29 Aug 2018: May’s Brexit “brave face” hits Sterling

May’s Brexit “brave face” hits Sterling

August 29th: Highlights

  • PM plays down Chancellor’s concerns
  • Trade data surprise could mean further tariffs
  • Euro rise against pound hits exports

Sterling correction over a Hard Brexit fears return

At some point, the phony war between London and Brussels is going to have to come to an end as the clock ticks down towards the UK’s departure from the European Union. The “playground bravado” being played out by both sides masks a real and growing fear that the UK will depart with no deal.

It is entirely possible that Brexit is an unsolvable conundrum with the interests of both sides unable to be met. The Irish border is a prime example of this. A closed border (following a no deal Brexit) will cause possibly irreparable damage to the economies of both sides but an open border is impossible under EU statute. Neither side in the negotiation can propose a solution that is satisfactory to the other.

Philip Hammond, the UK Chancellor of the Exchequer (Finance Minister), recently spoke of his concerns that GDP could fall by up to 10% in the event of a hard Brexit. Yesterday Theresa May played down such fears but failed to mention that any kind of Brexit will be significant for the UK’s growth prospects.

The internal bickering within the Government has overshadowed the entire process, while the opposition, devoid of any useful input, simply throw barbs, no doubt thankful that they didn’t manage to win the 2017 election.

Mrs. May’s comments during a visit to South Africa, designed to drum up trade deals and exploit opportunities post-Brexit, hit Sterling hard pushing it to a low of 1.2861 as the market took at face value a comment that a no deal Brexit would “not be the end of the world”.

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U.S trade position worsens despite tariffs

A couple of decades ago, the U.S. trade data was the most significant monthly release as it was a real indicator of U.S. economic activity. That has long since been overtaken by the employment report that, despite entirely spurious estimated numbers, has taken centre stage.

The reason for this change is primarily that the export of manufacturing output to mostly Asian countries in search of cheap labour has made the trade data into little more than a record of a deficit that has steadily grown.

Trade has become one of the hot topics of the Trump administration as the President has become infatuated with trying to punish those who sell to the U.S the goods they used to make rather than those large corporations who saw an opportunity to increase profit by lowering labour costs rather than fight growing trade union influence.

Yesterday the latest data on trade was released and it showed that the trade deficit has grown to $72.2 billion in July from $67.9 billion in June. President Trump’s slapping of tariffs on goods imported primarily from China but also from several other major trading partners have had little effect either because he has targeted the wrong sectors, or he has not realized that these are items that the U.S. needs no matter the increased cost.

The dollar index fell to a low of 94.43 before recovering to 94.72. It remains in a corrective mode as the influences that drove it to fresh highs through the summer gradually wane.

Euro climb versus Sterling a concern to exporters

The single currency rose to a high of 1.0991 versus the pound yesterday, its highest level in nearly a year, as Sterling suffers from concerns over a hard Brexit.

It has rallied for five straight sessions and has started the sixth on the front foot, climbing to 1.1000 from yesterday’s close of 1.1007 and continuing to attract buyers.

An unexpected beneficiary of this has been UK exporters to Europe who have seen their products become more competitive in what had become a tough market.

However, there are the beginnings of rumblings of discontent from EU exporters who see their goods becoming more expensive in the UK and being undercut by those they fear will become the UK’s major trading partners post Brexit.

The auto and aerospace industries are a significant example. The UK has a thriving auto parts industry and produces several pieces of precision engineering for Airbus and the Eurofighter. Any hope EU based firms had of taking over, as exporting becomes more difficult for the UK post-Brexit, are being dashed by the strength of the single currency.

So far, the euro has been immune from Brexit concerns, but to continue a theme, should a hard Brexit become a reality, the hit to the EU budget alone could send the euro tumbling, although possibly not against the pound which may well be falling in tandem.

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.”