Sterling gains as Merkel says deal possible by October 31st

Despite the misgivings of French President Emmanuel Macron, it appears that Boris Johnson is gradually winning over European leaders to his desire to scrap or at least completely revise the method by which a guarantee of no hard border between the two parts of Ireland can be achieved.

In bypassing Brussels and its bureaucracy and dealing directly with individual national leaders Johnson can be more practical outlining the reasons that the UK cannot accept being potentially tied to the customs union indefinitely. This tactic appears to be working. German Chancellor Angela Merkel has accepted the possibility of alternative arrangements while even Macron has thawed slightly.

The pound reacted positively to what is undoubtedly progress towards avoiding a no-deal Brexit, reaching a high of 1.2273 and closing at 1.2253. This is its highest level since late July and shows that traders have been awaiting some news in order to trim short positions. Versus the euro, the pound was able to regain the 1.1000 level which has proven to be a tough nut to crack over the previous few days. It closed at 1.1058, having earlier reached 1.1076.

Johnson’s ability to deliver on both his own promises and the demands of European leaders will be critical over the next few weeks. He will want to be able to report progress to Parliament when it reconvenes early next month.

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Eurozone data bottoming out?

The activity data released yesterday by both Germany and the Eurozone was just about as positive as could have been expected. While activity is still contracting both sets of numbers showed an improvement over last month.

While this is not a clear sign that there can be a sustained improvement in economic activity, there was a sense of relief that the data is possibly bottoming out.

The single currency reacted positively, initially reaching a high of 1.1113, but was unable to sustain it as the dollar exhibited further strength and it closed at 1.1081.

Next week is another important week for data in the region with sentiment data being released by Germany on Monday followed by their Q2 GDP on Tuesday. Later in the week, Eurozone confidence reports will be published, and the slight positivity gained from yesterday’s data will hopefully be continued.

It would be ironic that any positivity that the market is starting to feel towards the economy was shattered by the political events taking place in Italy. The President yesterday gave the warring parties four days to create a stable Government. Failing that he will call fresh elections.

With Matteo Salvini’s right-wing Lega Nord ahead in opinion polls, his original coalition partner Luigi di Maio is looking to “freeze” Lega Nord out of Government by forming “other alliances” which can hold a Parliamentary majority.

The odds remain on another election since the more “left-leaning” Democratic Party will make tough demands to enter Government.

Powell to speak at Jackson Hole

The U.S. economy will come under scrutiny again today as Fed. Chairman Jerome Powell makes a speech at the Jackson Hole Symposium. The market is still very unclear about the Central Bank’s intentions, particularly following more ambiguity in the minutes of the most recent FOMC meeting which were released this week.

It is hoped, but not really expected, that Powell will shed some light on the possibility of a further cut at next month’s FOMC meeting. He may set out what conditions would need to be precedent for further easing, but he is unlikely to go any further than that.

Meanwhile, the dollar index continues to regain its composure, managing to climb to a high of 98.39 before closing just eight pips lower following the rally in Sterling.

There will be a slew of data over the next two weeks to give the FOMC and the market some clue about activity in the economy, although not all of it is “forward-facing.” The second cut of Q2 GDP will be released and that is expected to show the economy grew at 2% between April and June. This may satisfy the Fed, but it is unlikely to quell the President’s demands for further rate cuts.

Durable goods orders, consumer confidence and trade data will also be released. This will provide the market with an opportunity to see how the near term looks and if trade with China is changing following the introduction with further tariffs and more on the horizon.