Prime Minister’s Brother resigns to add to Government woes

The resignation of Boris Johnson’s brother Jo from Government combined with his decision not to stand at the next General election, whenever that takes place, is llittle more than symbolic within the bigger picture of UK politics. Of course, the Opposition Parties and the media have made a great deal of capital out of the fact that the Prime Minister is being deserted by his own flesh and blood.

The pound continues to go from strength to strength against the dollar, which is beginning to weaken itself.
It is an interesting development that financial markets are buoyed by the fact that a no-deal Brexit causes such concern that its probable demise is greeted with a significant rally.

Traders are cutting short positions having ridden a wave lower for some considerable time.

Once the Bill that was agreed in the House of Commons on Wednesday passes into law and the electorate can get its teeth into an election campaign, things may start to look a little less rosy for Sterling.

If the Government looks like winning, both in holding the most seats and, more importantly, gaining an overall majority, then, theoretically, no-deal could be back on the table. However, if the opposition Labour Party makes significant gains, that is traditionally bad for the City and therefore the pound. Either way, this rally may not last too long or have much further to travel.

Yesterday, the pound’s rally versus the dollar extended to a high of 1.2354 and it settled back a little to close at 1.2331. Against a weakening euro, the pound made a high of 1.1177, a level not seen since late July.

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FOMC members seeing further economic weakness

Several members of the FOMC, the rate-setting committee of the Federal Reserve, have been expressing their concerns over the path of the U.S. economy. With global trade a major concern, despite confirmation that high-level talks will resume between Washington and Beijing in the U.S. next month, the economy may need the “security blanket” of at least one more rate cut to provide protection from any cyclical slowdown.

This week’s poor manufacturing data was followed by a slightly weaker than expected private sector employment report yesterday. Later today the more significant non-farm payroll data will be published. While there is little correlation between the NFP and the ADP data the two generally do not contradict each other.

The market’s expectation for the headline new jobs data has fallen slightly over the past few months and August is no exception with the addition of around 155k new jobs the median forecast.

Should the data be stronger than expected, Fed Chairman Jerome Powell will be likely to express caution following the next FOMC meeting which takes place in a couple of weeks, while a poor number may see him heed the advice of his colleagues and push for a further 25bp cut.

Yesterday the dollar index remained in a narrow range closing just one pip above its opening level at 98.40.

German factory orders plunge

The way in which the German economy is leading the rest of the Eurozone lower is as unlikely as it is unexpected. The economy fell by 0.2% in the second quarter which dragged growth in the entire region lower.
Later this morning the market will receive confirmation that the Eurozone grew by just 0.2% over the period between April and June.

Factory orders in Germany, a highly “forward-looking” piece of data which provides an insight into future activity, fell by an unprecedented 5.8% in July versus an expectation of a 1.1% fall and a fall of 3.6% in June. The seasonally adjusted data made just as bad reading with the headline falling by 2.7% in July following a 2.7% increase in June. This takes into account seasonal factors and the holiday season.

Once the German Government is back in full session it is expected that they will enact various measures to stimulate the economy, not least a tax cut.

The Bundesbank, ever fearful of inflation, is known to be against such a measure but Chancellor Merkel is committed to seeing the economy starting to move towards renewed health before she leaves the office.

The euro remains pivotal around the 1.1000 level versus the dollar and as the greenback weakened following the news over trade talks with Beijing, it rallied to a high of 1.1085 before falling back to close virtually unchanged on the day at 1.1037