Draghi comments not taken at face value
It is difficult to imagine the recent comments of ECB President Mario Draghi being any clearer. He, and his ECB Council colleagues, do not feel that growth is sufficiently resilient throughout the entire region for a rate hike to be a valid course of action. He has also been strident in his demand that policy is valid for the region as a whole.
It was therefore somewhat surprising that the the minutes of the most recent meeting of the ECB council, despite echoing those views almost word for word, led to a fall for the Euro.
This could mean that the Euro is running out of steam following its almost one-way rise through the second quarter and up to now. Traders “selling the fact” are an early indicator of such sentiment. It will need a bigger move than we saw yesterday to convince traders that the trend is coming to an end but it is most likely entering an exhaustive phase.
The Euro fell to test support at 1.1660 and 0.9070 but recovered as buyers re-emerged. Next week sees the release of various sentiment indexes in the Eurozone which should provide further support.
U.K. Retail sales continue supportive data releases
It has been a relatively supportive week for the pound as successive data releases have shown that the economy, while under pressure, is hardly in freefall.
Sentiment indexes are the major issue reflecting uncertainty brought about by a perceived lack of activity over Brexit.
This week, inflation, employment and now retail sales. While not stellar by any stretch of the imagination, they have, at least, provided a solid performance.
Inflation was unchanged at 2.6% which will have brought a little relief to the MPC. Wages data was a little stronger with average earnings rising by 2.1%. This still means a fall in real wages but the gap has narrowed. Yesterday saw the release of retail sales data. This was a little stronger month on month, rising by 1.3%. The year on year data suffered in comparison to a stellar performance in July 2016.
Next week the final cut of Q2 GDP is released. This is unlikely to bring any major surprise with Q2 growth at 1.7% despite a relatively weak 0.3% QoQ figure.
Sterling has clawed back a little of its recent losses. It tested but held the 0.9070 resistamce against the common currency while testing 1.2900 versus a greenback which is subject to a whole gamut of drivers.
Brexit driving sentiment lower
Backwards looking physical data releases may be providing support for the economy in general and protecting Sterling from the worst of the markets antipathy but forward-looking sentiment indexes show a totally different story.
Sentiment is being badly affected by Brexit but most interestingly, it is not the fact of Brexit that is affecting manufacturers and exporters it is the perceived lack of action from the Government coupled with what are fragmented plans.
The latest “wish list” contained a customs plan labelled as fantasy, a delay until December for the final bill and a wholly unimaginative solution for the border between the two Irish States.
This was not what was expected by the EU which is becoming more and more frustrated by the U.K.’s seeming belief that it controls the “Brexit clock” which is ticking down at an alarming rate.
If no genuine progress is made through the fourth quarter, 2018 is going to be a frantic time given that the settlement is going to be fully discussed by Parliament with a vote being taken on the final agreement
