Ransquawk

Trend intact but longs being liquidated

The Euro has seen one of the longest runs of strength in its brief history as a combination of monetary policy, political calm and a strengthening economy have led to buying of the common currency.

This strength has coincided with headwinds for both the dollar and pound which have contributed to the overall picture. Brexit is going to remain an issue for the U.K. until and probably well beyond the date set for departure from the EU on 31st March 2019. A little over 18 months away.

The Euro fell below 0.9100 and 1.2000 and looks likely to test the next supports at 0.9020 and 1.1820 which could lead to further weakness. Political concerns are likely to lead the correction as imminent German elections and an Italian vote early in 2018 drive worries. In Germany, the performance of the Anti-EU AfD party could lead to far-right representation in the Reichstag for the first time in fifty years.

Italy goes to the polls by May next year. The four main opposition parties are committed to the introduction of a non-implicitly guaranteed parallel currency which will ring alarm bells in Brussels, although since this is the only matter the four agree on, they won’t be forming a cohesive coalition any time soon.

Brexit becoming more real

The U.K.’s House of Commons last night passed a Bill to repeal the 1973 act that took Britain into the common market. The Bill also allowed for EU laws to be enshrined into the U.K.’s statute books although there was concern over Ministers being allowed to “tweak” laws prior to confirmation which was a “land grab” and undemocratic.

The relatively comfortable sixteen vote majority brought relief to the Prime Minister and her team but this was only the first of several battles still to be fought.

Brussels will have looked on patiently as this piece of purely domestic “housekeeping” took place in the full knowledge that matters like the Brexit Bill and the fate of EU citizens remaining after Brexit will bring further division which could lead to an election and a new Government.

Sterling reacted positively as traders looked for a reason to liquidate longstanding short Sterling positions although they will remain inclined to reinstate them as a winter of discontent begins. The October deadline for sufficient progress on the three issues demanded by the EU is likely to pass without sufficient progress to allow discussion over the future relationship to begin and this is also likely to bring a return of sellers.

Inflation, Employment and MPC to drive short term sentiment

Today’s release of the August inflation data will probably see price increases rising back towards 3%. A 2.6% rise in July is likely to be exceeded as year on year headline inflation reaches 2.8%. This will fuel hopes for a hawkish statement from the Bank of England on Thursday despite Governor Mark Carney’s belief that inflation is not being driven by an economy that is weakening but by the fall in Sterling.

Before the MPC meeting, the employment report will also be released. The headline, largely ignored since it is a propaganda tool, should be unchanged but there could be a small improvement in hourly wage increases from 2.1% to 2.3%. This will only serve to maintain the gap between wages and prices since inflation will have increased by a similar amount.

There is zero hope or expectation of a rise in rates with a 6-2 vote totally priced in but there remains a faint possibility that Carney could turn a little hawkish despite the headwinds facing the economy from the Brexit driven collapse in business investment.

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