Brexit negotiations under way
Sterling peaked just above 1.3100 against the Dollar yesterday for the second trading day in a row, after clawing its way to its highest levels for 10 months. Market participants were cautious as four days of Brexit negotiations began in Brussels. The Pound started this week by edging down from those highs, trading downward by around 0.1% on the day and pretty flat against the Euro.
The Brexit Secretary David Davis is in the Belgian capital for talks over the next four days with the European Union’s chief negotiator Michel Barnier, a month after their first meeting. Yesterday, David Davis said that having “made a good start” during their last encounter, “this week we’ll be getting into the real substance”.
The situation remains difficult for the Pound; as the recent reports of domestic political quarrels in the UK showed, in the short term, it may not be a breakdown of the Brexit negotiations, but a breakdown of the British government which is the biggest risk for Sterling. Investors will be watching British inflation data due on Tuesday closely. It seems that UK monetary policy is proving to have more weight than the Brexit negotiations, and if Tuesday’s inflation figures from the UK positively surprise the market, we could see some more Pound strength.
The Dollar sank to a 10-month low against a basket of major currencies on Tuesday, hobbled by uncertainty over the pace of the Federal Reserve’s policy tightening and worries that President Donald Trump will fail to deliver healthcare reforms. From its 14-year peak of 103.82 touched on January 3, it has lost 8.8%. Weighing on the Greenback, two more Republican Senators, Jerry Moran and Mike Lee, announced their opposition late on Monday to a revised Republican healthcare bill, delivering a serious blow to the legislation. If the bill doesn’t get passed, there may be no money for tax cuts.
Friday’s weak reading on US inflation and retail sales also fanned speculation that the Fed may not have justification for another rate hike by the end of this year, despite policymakers’ projection for such a move. Money market instruments are now pricing in less than a 50% chance of a rate increase for the rest of the year.
The Euro strengthened against major currencies yesterday. GBPEUR dropped to as low as 1.1344 while against the Dollar it rose to 1.1536. Euro found strength in the Final June Harmonised Index of Consumer Prices (HICP) inflation report released yesterday.
The Economic and Monetary Union (EMU) HICP inflation was in line with expectations at 1.3% y/y. This was down from May at 1.4% y/y, and there was also falling energy price inflation (4.5% y/y in May to 1.9% y/y in June). Core inflation, however, still remains far below the European Central Bank’s (ECB) 2% limit, giving the doves at the ECB a strong base to reason with.
Today, German ZEW investor sentiment, as well as the ECB’s bank lending survey (BLS), are due for release. Although the ZEW represents the sentiment for the German economic outlook, the BLS has the largest potential for volatility providing insight to the ECB Governing Council’s assessment of monetary and economic developments.
Data to Watch:
8:30am GBP Producer Price Index – Output (YoY) (MoM) n.s.a. (Jun), PPI Core Output (YoY) (MoM) n.s.a (Jun), PPI – Input (YoY) (MoM) n.s.a. (Jun), Core Consumer Price Index (YoY) (Jun), Consumer Price Index (YoY) (MoM) (Jun).
9:00am EUR GER ZEW Survey – Current Situation (Jul), ZEW Survey – Economic Sentiment (Jul).
12:30pm USD Export Price Index (YoY) (Jun), Import Price Index (YoY) (Jun).
13:30pm GBP BOE’s Governor Carney Speech.
14:00pm NAHB Housing Market Index (Jul).