Sterling lower as Euro Buyers Return
September 5th: Highlights
- Safe haven buyers buoy Euro
- Political risks weigh heavily on Sterling
- Davis to brief Parliament on Brexit before debate
Euro Correction short-lived
The Euro regained the 1.1900 level versus a broadly weaker dollar reaching a high of 1.1923. The North Korean situation is now providing support as the “golden scenario” of political stability, economic growth and low inflation is “priced in”.
This week’s ECB meeting is now expected to defer any change to the Asset Purchase Scheme until October. Mario Draghi is acutely aware of the effect any change in monetary policy could have on the economy and currency. Despite the Central Bank’s view that the value of the currency is a product of its actions which have contributed to economic and political stability, the strength of the Euro is starting to become an issue for those Eurozone economies that rely on a weaker currency to drive exports.
Recurring theme set to continue for Sterling
The pound hasn’t fared any worse than the dollar against the single currency over the past few months but it has been convenient to use Brexit as an excuse for its weakness. The major concern for the pound is how much worse the economy can get. U.K. business is very resilient during downturns and slowdowns but the uncertainty of how they will be allowed to interact with a market that attracts 45% of all U.K. exports means they cannot plan for expansion and have withdrawn into a neutral stance until clarity is provided.
The weakness of the pound is providing some respite to exporters as they find it easier to sell their goods but for manufacturers that benefit is almost completely removed as factory prices soar due to the imported inflation from the weaker currency.
Davis to brief Parliament ahead of debate
The Autumn is going to be a crucial time in the Brexit process. The EU is sticking to its demand that progress is made in three specific areas before any talk of the future trading relationship can begin.
The most pressing of those items is the exit bill, as the Irish border and the treatment of EU citizens remaining in the U.K. can be deferred once proposals are in place. There are rumours and counter rumours about the size of the bill due to the number of legal grey areas which mean that any comments regarding the legal requirements for a settlement are rendered pointless. Continued negotiation will be necessary to reach a settlement, something the U.K. side seem reluctant to undertake. It is probable that Michel Barnier has a figure in mind that the EU will accept but it is the prevarication coming from the U.K. side which is creating uncertainty.
Have a great day!
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”