May Facing Tough summer

Political intrigue set to begin

The weekend press in the U.K. carried stories that, almost as Parliament rose for the summer recess, a letter was being drafted outlining a motion of no-confidence in the Prime Minister. Such a move is believed to have a core support of fifteen MP’s with the “magic number” being forty-eight.

Once a motion has forty-eight supporters then a no-confidence vote must be taken. A column in one of the Government’s most supportive newspapers said she will do well to “cling on” until the Party Conference which takes place on 1 – 4 October.

Prime Minister Theresa May is facing a leadership challenge at some point and it could be better for her if she is able to choose when that happens rather than waiting for it to be forced upon her.

The pound has managed to claw its way back above 1.3000 against the dollar but continues to weaken towards 0.9000 against the Euro. The dollar which is facing its own political, as well as economic, headwinds continues to weaken cross the board.

The divisions between the various factions of the U.K. Government are widening as the likely leadership contenders fight a phony war. Brexit is the battleground for now as soft and hard Brexiteers line up to have their say.

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Euro Strength to delay Monetary Policy tightening

Mario Draghi, the ECB President, was as forthright and clear as usual in his press conference following last week’s Council meeting.

Monetary Policy is now made up of two very distinct parts; interest rate and quantitative easing. The need for a change in the former doesn’t exist whilst the time for removal of the latter is approaching.

Draghi commented that the date for commencement of removal of “extraordinary” measures will be discussed in the Autumn. As usual traders got ahead of themselves and took this as an oblique confirmation that the Asset Purchase Scheme would start to be wound down early in the new year. Removal of additional liquidity will have its own tightening effect on monetary policy raising interbank interest rates while official rates would remain unchanged.

The Euro paused in its march higher on Friday as summer began in politics and education. It has reached a high of 1.1685 against the dollar and 0.8997 versus Sterling.

Currency strength has a dampening effect on inflation as import prices fall but also hampers exports as goods sold overseas become more expensive. It is likely that the recent falls seen in inflation, both for individual Eurozone members and in the region-wide composite data, will hamper further rapid rises for the common currency.

Trump facing another crisis

The resignation of White House spokesman Sean Spicer, has dealt yet another blow to the credibility of President Trump.

Politics is weighing heavily on the dollar currently and traders will be looking towards this week’s FOMC meeting and release of preliminary Q2 GDP data to give it a lift.

Following on from the defeat of Trumps healthcare reform bill, Spicer’s resignation illustrates an administration in disarray. The fracture between the President and congress is widening leading to doubts over Trumps ability to pass fiscal reform and economic stimulus measure which are now long overdue.

The FOMC meeting which concludes on Wednesday and is followed by a press conference
Is likely to leave interest rates on hold. The data that has been released since the last meeting (where rates were raised by 25bp), has been mixed at best and doesn’t warrant a further hike right now.

Friday sees the release of Q2 GDP data with an expectation for an optimistic 2.6% rise. This follows a final 1.4% annual increase in Q1 and should provide some support to an ailing greenback.

Euro falls despite improving economy

The pound rose to a high of 1.3114 on Friday as the break above the previous year’s high of 1.3040 drew a round for technical buying as short positions were closed out. If the pound can maintain these levels the MPC’s job in containing inflation will be made a little easier. The pound also rose against a Euro that was struggling to make headway versus a weaker dollar running into strong resistance close to 1.1500.

The pound rose to 0.8742 its highest level in a month. There is no precedent for how the currency will react as Brexit talks “get down to business” and announcements will be closely scrutinized for possible economic effects.

The MPC meeting to be held on August 3rd and is building up to be the most important since the financial crisis with the economy very finely balanced. Those members favouring a hike have been weakened by the departure of Kristin Forbes with just two members certain to vote to raise rates, chief economist Andrew Haldane wavering and the intentions of new member Silvana Tenreyro’ voting intentions unclear.

This week’s events of note

The U.K. Parliament starts its summer recess. Brexit concerns will remain