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Anticipation high, fanfare low: Brexit starts here!

Anticipation high, fanfare low: Brexit starts here!

GBP 
Friday saw further speculation over a shift in Brexit negotiating stance. There was talk of a possible transitional move to remain in the customs union in order to avoid trade disruption, although such a deal would preclude new trade agreements outside the EU. Sterling hit resistance close to 1.2800 against the Dollar while the Euro rallied to the 1.1415 area.

Bank of England MPC member Kristin Forbes stated that Sterling weakness was the key for inflation trends and that this has tended to be under-estimated in the Bank’s economic models. Markets will monitor comments from MPC members for the possibility of higher interest rates.

The Brexit talks will officially start at 10am today, with the opening gambits important for underlying market sentiment. Sterling is liable to be vulnerable if there is a confrontational tone.

EUR

Eurozone headline inflation printed at 1.4%, in line with the flash reading and consensus forecasts. President Macron’s En Marche party was confirmed as securing an overall majority in the parliamentary elections run-off which provided Euro support, although there was selling above 1.1200 as markets waited for monetary policy developments.

In the past week, Macron has made increasingly sweeping promises to reform France and unleash innovation, starting with the labour market. Macron certainly has the mandate to do it and any early successes are likely to underpin the Euro.

USD

Housing data was weaker than expected with a decline in building permits to an annual rate of 1.1mn while housing starts declined to an eight-month low of 1.09mn. The data maintained concerns surrounding the construction sector, although there was further evidence that weakness was related to supply rather than demand issues. The University of Michigan consumer confidence index declined to 94.5 for June from a revised 97.1 the previous month, and the Dollar lost ground. The labor market conditions index, however, registered a further increase of 2.3 for May after a 3.7 increase for April, which maintained overall confidence in the labour market. 

Dallas Fed President Robert Kaplan stated that the Fed must be patient in raising interest rates further and that he would need to see an improvement in inflation. Minneapolis President Neel Kashkari explained that he wanted more evidence that low inflation is transitory before increasing interest rates again.

Data to Watch:
11am German Buba President Weidmann speech. 
9.30pm RBA Meeting Minutes

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