Brexit no closer as Politics overshadows Economics
Ratings agency Moody’s announced yesterday that the UK’s credit rating could be at risk given that the election outcome was likely to delay and complicate Brexit talks. Moody’s, however, also stated that the outcome could lead to a ‘softer’ Brexit which would have some positive implications for the credit rating, illustrating the mixed influence.
The Queen’s speech has been delayed for a few days while a coalition is finalised, depressing Sterling sentiment. Whilst Brexit Minister David Davis insisted that there would be no change to the government’s negotiating stance, there is speculation that the government would be forced towards a ‘softer’ Brexit stance, especially with rumours of cross-party efforts to block a ‘hard Brexit’.
Inflation data will be the data to watch today, with any further increases maintaining pressure for higher interest rates as well as increasing concerns over a squeeze on real incomes. Sterling found support below 1.2650 against the Dollar with the Euro retreating from seven-month highs at 1.1310 in choppy trading conditions.
With no significant data released yesterday, the markets were braced for tomorrow’s Fed policy statement. Flows were mostly subdued as traders braced for a trifecta of central bank meetings this week; the Fed will be followed by the Bank of England (Thursday) and the Bank of Japan (Friday morning).
While the Fed is expected to raise rates by 25 basis points, the BOJ and the BOE are forecast to hold. Although a rate hike is priced in, there is considerable uncertainty surrounding forward guidance. Markets overall are expecting a relatively dovish US stance with some scaling back of expectations of medium-term tightening plans.
Underlying confidence in the Euro was supported by the French and Italian election results and there was a significant narrowing of peripheral yield spreads which helped underpin confidence in the Euro amid expectations of net capital inflows. Macron’s En Marche party has odds for a majority. The Anti-EU, Italian, 5 Star Movement didn’t live up to expectations with the mainstream parties faring better. There was further confusion surrounding the impact of UK election uncertainty on EU exit talks.
Increased uncertainty could have a negative impact on Eurozone business confidence, although a stronger negotiating position could provide significant underlying support for the Euro as Chief Negotiator Barnier warned that time was pressing. Overall, the Euro edged slightly weaker on positioning shifts, with the single currency edging just below 1.1200 at market open with positioning likely to be a key influence ahead of Wednesday’s Fed statement.
Data To Watch:
07:00am EUR Wholesale Price Index (MoM)(YoY).
09:30am GBP Producer Price index – Output (MoM) (YoY) (May), Producer Price index – Input (MoM) (YoY)(May), PPI Core Output (MoM) (YoY), Core Consumer Price index (YoY), Consumer Price Index (MoM) (YoY) (May).
10:00am EUR ZEW Survey – Current Situation, ZEW Survey – Economic Sentiment (Jun)