Sterling reacts positively to Brexit hopes
August 26th: Highlights
- Johnson gets tough over “divorce payment”
- Trump ratchets up trade war, dollar skids
- EU looking to rewrite the Growth and Stability rules
Chances of a Brexit deal improving
It was clear that there is agreement among the industrialized nations that what is happening to the Brazilian rainforest is becoming a global disaster, but the talk was more about trade and the prospects for a deal over Brexit.
Outgoing European Council President Donald Tusk traded barbs with Johnson over who would be the recipient of the title “Mr No-Deal”.
President Trump was fulsome in his support for the British Prime Minister.
It appears that the charm offensive is starting to pay off, but the velvet glove contains a fist of steel in the shape of a refusal to pay the £39 billion payment due from the UK for its departure from the group. Johnson made it clear that should the UK leave the EU on October 31st, without a deal in place that it is his belief that the UK will not be legally bound to make the payment.
Sterling had a very strong week last week as traders hopes over a Brexit solution were coupled with a weakening dollar. It traded as high as 1.2294, closing at 1.2278. Versus the euro, the pound continued its recent gains, reaching a high of 1.1076, and managing to remain above the 1.1000 level, closing at 1.1026.
Along with his support for Johnson as Prime Minister, President Trump also promised a “bumper” trade deal as soon as Brexit is complete. Johnson was a little more circumspect regarding trade, outlining his expectations for a wider-ranging deal than the U.S. may propose.
President Trump continues to attack at home and abroad
In response to Trump’s additional tariffs, Beijing has allowed its currency to fall to its lowest level in eleven years. Overnight, it has reached a high of 7.1490. The yuan has weakened by close to 4% since the start of August.
With neither side in the mood to compromise, the optimistic noises that were being made about a solution to the trade conflict being found are fading.
To ease growing tensions between the Administration and the Central Bank, Treasury Secretary Steve Mnuchin has said in an interview that the labelling of Powell as an enemy should not be taken literally.
In his speech at the Jackson Hole Symposium on Friday, the Fed Chairman seemed to be more accepting of the need for lower interest rates in the US. As equity markets fell following President Trumps ramping up of trade tensions, Powell noted an “eventful period” since the last FOMC meeting with more evidence of a global slowdown. Slowing global growth, trade policy uncertainty, and muted inflation are Powell’s primary concerns as he appeared to turn just a shade more dovish.
The dollar index fell last week reaching a low of 97.59 and closing at 97.67. It remains in an uptrend on longer-term charts but any recovery in the Eurozone (see below) could see the greenback’s fall accelerate.
Brussels looking to provide Frankfurt with assistance
Simply continuing to ease monetary policy is failing to stimulate the economy since banks cannot lend due to weak balance sheets and customers who are either heavily indebted or unable to pay the loans they already have need Government help.
The words of Italian Deputy Prime Minister Matteo Salvini must be resonating in Brussels as it is beginning to emerge that revisions to the debt and stability pact are much further advanced than had been imagined. Salvini has been critical of Brussels believing that the financial straitjacket of the budget and debt restrictions unfairly penalize weaker economies particularly when there is a slowdown.
Italy is a prime example of the issue. It has not been able to recover from the Financial Crisis of 2008 since the EU insisted on Italy keeping its budget deficit within strict guidelines and not allowing its debt to GDP ratio to grow. This cut off the ability of the Government to borrow to fund infrastructure projects which would bring prosperity to workers and add to tax revenues.
Rome had put Brussels in a difficult position by flouting the rules on its budget deficit and escaping punishment. It now seems that with Italy about to “do it again”, Brussels is looking at ways to relax restrictions to allow weaker economies to “inflate” their way out of the current slowdown.
While details of any plans remain under wraps, the positivity the rumours will create could see the single currency receive a boost. Following last week’s data, which while not improving much, slowed the slide lower, the Eurozone economy needs an injection of positivity.
Last week, the euro rallied on the back of a weaker dollar reaching a high of 1.1154, closing at 1.1143.
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.”