Daily Market Brief 9 July 2018

Sterling rally falters as Davis Resigns

July 9th: Highlights

  • Mays plans in danger of collapse
  • Dollar lower following “mixed” employment report
  • Euro higher as headwinds fade

Brexit plans bring first casualty

David Davis, the Brexit Minister resigned yesterday following the publication of the UK Government’s proposals for Brexit. Fridays meeting of Theresa May’s Cabinet at her country residence eventually showed a sign of “forced unity” as all those present eventually signed off on the plan.

Despite Mrs May calling for her Ministers to rally behind the plans and show a united front, several of them have had a “quiet chat” with their favourite reporters allowing their disappointment with the proposal to be made public. As ever, Foreign Secretary Boris Johnson is at the forefront of the dissenters but has remained in his post, for now.

In his letter of resignation, Mr. Davis stated that he felt that this Brexit will unlikely be what the people of the UK voted for and now leaves the UK in a weak negotiating position with Brussels.

So far, there has been no official comment from Brussels on the new proposals which many have labelled a “fudge” which keeps the UK tied to many of the tenets of EU law. It has been said that these plans, if implemented, could leave the UK worse off than remaining in the EU. The current proposal will have to comply with many laws that caused Brexit in the first place without having the benefit of full membership of the single market and customs union.

Mrs May has even announced that she is considering a plan which will allow EU citizens who want to come to the UK post-Brexit “special rights” not available to other countries citizens.

The pound rallied initially on the relief that a unanimous decision, no matter how forced, had been reached. It climbed to 1.3290 and closed within a few pips of that level. Overnight it opened higher, reaching 1.3322 and has managed to stay close to the 1.3300 level.

The currency is likely to have a volatile week as it remains to be seen if Davis’ is the only resignation from the Government’s Front Bench.

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Dollar lower as Employment report disappoints

The “fracture” between the headline employment data and the direction of the dollar is starting to grow as Friday’s non-farm payroll data showed surprising strength. 213k new jobs were created and the already strong May figure was revised up from 223k to 244k.

The dollar index fell following the report reaching a low of 93.92 as traders concentrated more on the wage inflation data which was unchanged at 2.7%. This disappointed analysts who had expected a rise to 2.8% or even, in some cases, 2.9%. That would have provided both a boost to the dollar and some verification to the Fed’s plans to hike rates twice more in 2018.

The Fed, it appears, is “hell bent” on the normalization of short-term rates and should provide underlying support for the dollar as the other major economies (the UK and Eurozone in particular) keep rates low as their economies falter, in the case of the Eurozone, and teeter on the edge of a precipice in the UK.

The headline employment number has long been the single piece of data that drives short term direction for the dollar, but in a similar way to when the trade report held that position, it is beginning to lose favour as traders and Central Bank’s focus changes. Inflation, in all its forms, has taken over and the Fed has made a clever move by hinting that it takes more notice of personal consumption data than the consumer price index as that performs more in the manner they are hoping to achieve and is less volatile and seasonal.

Euro marking time during slow march higher.

It appears that the markets view of the euro is that if there is no real reason to sell it, it may as well be bought as it recovers from a series of yearly lows seen recently.

The ECB, roundly congratulated for how it dragged the Eurozone through the financial crisis, has a definite propensity for “kicking issues down the road”. Mario Draghi has finally agreed that the Asset Purchase Scheme can be tapered from September and fully withdrawn by year-end, but he has added a little reported caveat that should the economic situation demand, he would have no hesitation in reinstating it. Quantitative easing, not seen for decades, has now been seen twice in a matter of years.

Draghi’s warning refers to Italy which has been the largest beneficiary of the scheme since it has found a home for its burgeoning debt, which is growing towards 150% of GDP. It is a misconception that in December, the Asset Purchase Scheme will be unwound since that is not the case. The removal will be a gradual process in which most bonds will be held until maturity and it is only fresh debt, that will need to find a fresh bid. This is where Italy will suffer as it tries to fund ambitious social welfare reforms, lowering taxes and raising social benefit.

The Euro rose to 1.1768 on Friday, before closing at 1.1743 and has continued to climb, almost by default, overnight, reaching 1.1768 again.

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.”