Daily Market Brief 5 September 2017

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

Buyers returned to the common currency yesterday as its newly found safe haven status was confirmed. In times of global tension and risk aversion, the Japanese Yen and Swiss Franc were traditionally investors destinations of choice. Both have solid current account surpluses and Japan is the world’s largest creditor nation. It is believed by investors that when risk aversion is rising Japan will repatriate assets thus driving the Yen higher. The Eurozone, which also has a substantial current account surplus has recently seen the Euro added to the unofficial list of safe havens.

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.

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Recurring theme set to continue for Sterling

It is obvious that if the common currency is going to be bought due to its political and economic stability, then the pound will be sold as the country moves in the opposite direction. Brexit provides the direct link between the two economies but the greater diversity of the Eurozone means Brexit is less of a drag.

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allowed to interact with a market that attracts 45% of all U.K. exports means they cannot plan for expansion and have withdrawn into a neutral stance until clarity is provided.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

David Davis the Brexit Minister is set to brief Parliament on the progress of Brexit talks as legislators return from their summer break. The Bill to repeal the act which took the U.K. into the common market in 1973 will receive a second reading this week with the opposition already saying that it is going to table a series of amendments which will, at least, delay progress. Should they receive any support at all from rebel Conservatives it could drive a return to the drawing board!

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.”