Ministers Brexit Deal fails to lift Pound
August 15th: Highlights
- Agreement on need for transition period
- Pound falls through 1.3000
- Inflation data due later today
U.K. firmly in markets’ focus
A deal appears to have been reached between hard and soft Brexiteers in the Government over the fact that a transition period will be necessary following the official leaving date of 31st March 2019. This transition or at least the proposal put to the EU will now contain a temporary customs union.
British business has been cautious over investment and this has been a major contributor to the slowdown in the U.K. economy. It is at least encouraging that the Government is now starting to bring a little clarity to its Brexit position but whether that in itself is sufficient to turn around business confidence is difficult to say.
New Brexit proposals have been welcomed by The Confederation of British Industry who have been calling for concrete proposals to enable its members to understand the post-Brexit landscape. The “softer” the Brexit that finally happens the more business-friendly it is likely to be. Cabinet hardliners have nothing to gain from blocking proposals for a temporary customs union and a transition period since they will achieve their goal in any event. It more a question of timing and a messy departure in March 2019 could spell disaster for the U.K. economy.
Pound loses 1.3000 support as Brexit realities bite
There has been a form of benign neglect from the market as the dollar has been battered, losing close to 10%.
As politicians and traders return from holiday and the market starts to pick up, Sterling looks likely to be “front and centre”. Yesterday it fell through the 1.3000 level against the dollar which had been considered a pivotal point for judging relative strength or weakness. Versus the single currency the pound’s fall is starting to accelerate with hardly any pullback. Yesterday it reached 0.9100 and the high from last year of 0.9143 is a viable target.
The dollar has found some support in stronger employment data which will add to the pressure facing the pound. The Euro, where monetary policy is also likely to remain supportive, is facing a period of sustainable growth coupled with benign inflation. This combination generally leads to a stronger currency and could lead to an eventual test of the 0.9335 multi-year high.
U.K. inflation data due for release
The June data showed a surprise fall in inflation and was sufficient to finally convince the MPC that a rate hike was too risky in the present economic climate.
Today will probably support BoE Governor Mark Carney’s assertion that it doesn’t pay to study one set of numbers in isolation and the trend is what is important since there will always be anomalies.
Headline inflation is likely to be at 2.7% in July. The BoE has already, in its Quarterly Inflation Report, said that it expects inflation to peak at 3% in October. Carney has been quoted as saying that inflation is solely due to the performance of the pound since the Brexit referendum.
Further currency weakness in the coming months could mean that the MPC is faced with the stark choice of risking tipping the economy into recession by hiking rates to both control inflation and support the currency.
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.”