Brexit will possibly slow recovery

Brexit could still bring issues for the UK in terms of being able to export to Europe.

Issues over red tape have been hidden amongst the several issues that have faced businesses as the economy has opened up.

The soaring cost of raw materials, shortages of parts, especially semiconductors, issues over migrant labour following Brexit, particularly in the hospitality sector are all unlikely to be solved in the short term.

Several representative bodies, including the CBI and Federation of Small Businesses, have been lobbying officials on both sides of the Channel to step in to cut the level of bureaucracy that is endangering their member’s very existence.

The UK economy will remain under the microscope this week as preliminary data for services output is released. Despite a shortage of labour, the index remains well above the line between expansion and contraction. It is expected that the index could touch 70 following last month’s reading of 69.6.

With services accounting for around 80 of UK output, this should be a positive outcome for Q3 GDP.

This week should see the end of any summer lull market activity since, following holidays in both the UK and U.S. next Monday, the pressure will begin to mount for guidance from BoE officials regarding the beginning of the withdrawal of support.

It is expected that the MPC meeting on 23rd September will provide further clues, but there are caveats; first the meeting does not include a full monetary policy report, that will not happen until November and, two, the withdrawal of furlough support for workers won’t have ended, so its effect on employment won’t be fully realized.

The pound suffered at the hands of a resurgent dollar last week. It fell to a low of 1.3602 and closed at 1.3622. The level to watch out for remains around 1.3510 but for now it would take a major event to see that tested.

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Can he afford to be hawkish enough to continue advance?

Jerome Powell has decided not to appear in person at this week’s Jackson Hole symposium, run by the Federal Reserve of Kansas. It is possible that the market could make something of this in a slow news week but given that neither Andrew Bailey nor Christine Lagarde will be present it will be a non-story.

The market should be far more concerned over Powell’s word than where he delivers them from.

He has been showing a degree of concern recently over the spread of the delta variant of Coronavirus and the effect of synch an unknown quantity on the economic recovery from the Pandemic.

If he branches out regarding the recovery and hints at any delay in the taper of asset purchases, the dollar is likely to slow its recent advance or even reverse its recent trend.

There have already been signs as the market has opened in Asia that long dollar positions are being trimmed.

The minutes of the most recent FOMC meeting were the catalyst for renewed dollar strength last week, in a move that was magnified by both a lack of positive news for other major currencies and lack of liquidity.

Powell could also be forgiven for being distracted by his personal position. He is up for renewal of his contract as Fed Chairman and there has been some doubt about President Biden’s feelings, although this may also be the product of slow news as Powell has already received a ringing endorsement from treasury Secretary and former Fed Chair Janet Yellen.

Powell’s term ends next February, but the President is expected to decide early next month. There are reasons for Powell to be positive. First, he has managed the Fed through an incredibly volatile period, and second, with the economy still in a somewhat precarious state a change at the top wouldn’t be very prudent.

Last week, the dollar index advanced to a high of 93.72, closing at 93.45. As already mentioned, it has opened a little lower in Asia, but it is too soon to talk about anything other than a shallow correction.

ECB content to run at its own pace

Christine Lagarde will be another no show at Jackson Hole this week, although she is likely to appear virtually.

The ECB has already signalled that it intends to run at its own pace, with no heed being given to when the Fed will start to taper its asset purchases. Lagarde, while not actually providing a date, has given sufficient advance guidance to the market that support will last beyond the first quarter of next year.

This stance could see the euro suffer over the winter period and depending on how far it falls, it could have a significant effect on inflation, a topic that is dear to the heart, of several Governing Council Members.

One positive for the ECB has been how well the Union has dealt with the delta variant overall.

The euro lost one percent versus a surging dollar last week, but that could have been significantly worse had the market been more concerned about how the spread within Europe.

It is odd that the removal of most restriction within Europe, coupled with a high vaccination rate, has seen infections remain controlled

This week’s advance PMI’s will give a good indication of how the recovery is progressing. It is expected that the composite PMI will have fallen marginally from 60.2 in July to 59.5 this month.

That may be enough to provide a little respite to the euro, which, although it breached significant support at 1.1700 last week, managed to end up close to that level. It made a low of 1.1664 and closed at 1.1697.

Minutes of the latest ECB meeting will be released this week but given the level of advance guidance the market has been receiving and the well-known views of the more hawkish members of the Council, there are unlikely to be any surprises.