Barnier promises flexibility again
Chief Brexit Negotiator Michel Barnier provided Friday’s main Sterling news with reports that he will consider other Northern Ireland (NI) backstops if needed, and the EU is ready to simplify border checks if needed. The caveat was that there would be no “deal” without a working NI backstop but the comments triggered another round of short covering and Sterling rallied.
There was another push above 1.3000 against the Dollar before US strength reset the balance, and the Euro retreated to 3-week lows near 1.1200. CFTC data recorded only a slight decline in short, speculative Sterling positions (bets the Pound would fall) from record highs, maintaining the potential for a squeeze (rapid reversal of bets causing Sterling to rise).
Sterling volatility will likely continue in advance of the next EU Summit on September 20th. The currency conciliatory EU rhetoric remains offset by ongoing Conservative Party tensions with the Euro near 1.1185.
Nonfarm payrolls beat expectations with 201,000 for August, compared with expectations of 190,000, although the July data was revised downward. Unemployment held at 3.9% in August, although the household data reported a sharp drop in employment as the labour force declined. Average hourly earnings increased 0.4% for the month with the annual increase strengthening to 2.9% from 2.7%, the fastest pace of increase since 2011.
The earnings data fed expectations of higher inflation and the Dollar gained ground following the release, with initial Euro losses to the 1.1580 area. A September rate hike remained fully priced in and the chances of a further rate hike in December increased to 70%. Dallas Fed President Kaplan stated that rates would not reach a neutral level until mid-2019 and only then would it be necessary to make a judgement on whether policy should become restrictive. Trade tensions and rate hike expectations currently support the Dollar, in what will be a data-light Monday.
Italian Prime Minister Conte has reassured the public that the Italian government had never considered leaving the European Union, but any positive effect this was going to have on the markets was quickly overshadowed by an IMF warning of the negative impact even a slight recession could have on the fiscal health of the country.
ECB Council Member Coeure caused the Euro to dip by stating that the Eurozone has to be the priority. Off the back of this, the Euro dipped further against the Sterling and the Dollar.
Data for this week for the Euro is the conclusion of the ECB’s policy meeting on Thursday and their interest rate decision. All in all however, the UK’s data this week overshadows most of the news out of Europe, with very little important data due out.
Data to watch:
09:30 GBP Manufacturing Production (YoY) (Jul)
09:30 GBP Manufacturing Production (MoM) (Jul)
09:30 GBP Industrial Production (MoM) (Jul)
09:30 GBP Gross Domestic Product (MoM) (Jul)
13:15 CAD Housing Starts s.a (YoY) (Aug)
20:00 USD Consumer Credit Change (Jul)