May’s Fate tied To Chequers Proposals
July 17th: Highlights
- U.K. Employment unlikely to confirm rate hike
- Powell testimony to shed light on rate hike reasoning
- Euro in doldrums as lack of new drivers continues
Government makes concessions to survive vote
Rebel pro-Brexit MP’s forced the Government to accept a series of amendments to the original proposal which will be tough to get Brussels to agree to. The Prime Minister suggested that the amendments were in-line with Government thinking while remainers asked: “If that is the case why weren’t they included in the original text?”
Sterling is barely reacting to the goings on in Parliament since traders remain convinced that a soft-Brexit is good for the currency while a hard-Brexit is not. It is almost as if those who are short are simply waiting for the crash. There is little positivity towards the pound so there are very few long positions. It is entirely possible that even the turmoil caused by the announcement of a second referendum would bring some relief. Yesterday, the pound made a little ground reaching a high of 1.3293 but closed just five pips above its open at 1.3235.
Today’s release of employment data for June won’t bring any confirmation of a possible August rate hike as wage inflation is likely to have fallen from 2.8% in May to 2.7% in June.
Powell to shed light on rate hike views
The U.S. economy is performing adequately but not showing any sign of overheating. Inflation is not quite benign but still doesn’t necessarily need to be brought under control. Powell, a lawyer by trade, may be allowing himself to be influenced by possibilities rather than by hard evidence and this points to a policy of hope over expectation.
The U.S. has always been governed with one eye on big business and policy has tended to be supportive of this view but with a President who comes from that world and no past political experience a cabinet which resembles a boardroom ensues.
The dollar index was steady yesterday as it awaited today’s testimony. Powell is expected to either ignore the effect of or be marginally supportive of the growing trade war with China. He could touch on its inflationary effect to support his strategy but as a Republican and supporter of the President, he will steer well clear of any opposing view. The index ranged between 94.77 and 94.41 yesterday, closing at 94.51.
EU, Eurozone and Euro content to sit, watch and wait
There is a degree of astonishment in Brussels that with more than three-quarters of the time available elapsed, the UK still doesn’t have a workable proposal for the future relationship between two significant trading partners. It will soon have to start to plan for a hard Brexit, particularly since it now almost “taken as read” that the Chequers proposal will be deemed unworkable.
Having allowed “Storm Trump” to blow itself out, the President’s antipathy towards the EU well known, and his criticism of the relationship between Russia and Germany barely a surprise, Brussels simply waits for the trade spotlight be turned in its direction.
The ECB continues to show benign neglect towards the currency allowing it to weaken of its own volition without any further nudges from dovish monetary policy.
The contrast between two economies that are performing adequately couldn’t be starker. In the U.S. the expectation is for stronger growth with higher inflation which will require higher rates. In the Eurozone, the bar is set appreciably lower; continued growth however small in the weaker economies, control of inflation and a steady as she goes monetary policy are the goals.
The latest GDP readings for the U.S. and Eurozone? U.S, 2.8%, Eurozone, 2.5%. Economic activity, a lot like beauty, is in the eye of the beholder!
The single currency remains hemmed in. Yesterday, it traded between 1.1726 and 1.1675 versus the dollar, closing at 1.1711.
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.”