Daily Market Brief 28 July 2017

Sterling Clinging On

July 28th: Highlights

  • Brexit bill still “far from agreement”
  • Barnier hints at delay to trade talks
  • U.S. Q2 GDP data released later

Limited progress to hamper trade deal

Michel Barnier the EU Chief Brexit Negotiator held a press conference yesterday at which he repeated concerns over the progress being made in Brexit talks. He had hoped that there would be material progress about EU citizens’ rights, the Irish border and the exit payment by October but now believes that is unlikely before December.

Barnier is sticking to his guns over any trade agreement following Brexit. Talks, he says, cannot start until there is far greater agreement over his three preliminary requirements.

The exit bill is causing the greatest conflict with the U.K. Brexit ministry commenting that “we have been clear that we recognise the UK has obligations to the EU and that the EU also has obligations to the UK.” Any further such rhetorical nonsense will bring the prospect of a hard Brexit much closer with the attendant issues that would bring for the pound.

The pound is clinging to its recent gains as “summer markets” prevail. There is a lack of clear direction and Sterling has entered a reactive phase where it is driven by what is driving other currencies. It is, however, now well established above 1.3000 against the dollar, correcting from a high of 1.3160 to 1.3080.

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Data to determine short term direction for currencies

Today’s release of preliminary Q2 GDP data in the U.S. is expected to show a return to trend growth following Q1’s surprisingly weak number.

After Wednesday’s FOMC meeting the Fed is clearly on hold, most likely until next year. They will have received advance notice of the data so traders are prepared for the predicted 2.6% increase to be the best that can be expected.

Business and consumer confidence data for the EU is also set for release later today. The rise in the value of the Euro over the past month will have provided a challenge to business and some weakness in the data is possible. Consumers continue to be concerned over high unemployment data and a slight fall in confidence data could lead to a shallow correction for the single currency.

German inflation data is also set for release. This will likely continue the fall seen in May when it dropped below 2%. A 1.5% headline following May’s 1.6% will bring comfort to the ECB as they struggle to provide cohesive regionwide monetary policy.

The Euro has now fulfilled its medium-term objective at 1.1780. Although any correction will again be shallow, from a technical perspective it will need to take place before it can push higher again.

MPC meeting loses material significance

Next week’s meeting of the Bank of England’s Monetary Policy Committee has lost significance following recent data releases. The fall in the oil price (although recently corrected) together with the, relative, strength of the pound has led to a fall in inflation concerns.

The IMF prediction of weaker than expected GDP growth in 2018 backed up by a far from convincing 0.3% rise in Q2 has almost certainly removed any possibility of a rate hike.

Interest in the meeting will be generated by the votes cast by the members. At the last meeting two independent members, Ian McCafferty and Michael Saunders voted for a hike as inflation was approaching 3%. How “data dependent” their votes are will provide interest. Andrew Haldane, the Bank’s Chief Economist had previously stated that he was considering a change to his vote. Whilst he could also be “data dependent” he should have a longer-term view.

Finally, there is a new member joining at this meeting. Silvana Tenreyro is a professor at the London School of Economics. She has previously been quoted as believing that Brexit will have a negative effect on the U.K. economy. This would appear to place her firmly in Governor Carney’s “steady as she goes camp” but we will need to wait for next Thursday for confirmation.

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.”