Brexit, Data and BoE to determine short term direction

Whilst traders have come to believe that Brexit is the only driver of the pound’s direction it is the effect of the U.K.’s decision to leave the EU that creates movement.

This week employment and inflation data will be released and in the words of Mark Carney, the Governor of the Bank of England, it is trends that are important not individual months numbers. The trend for headline employment has been consistent recently driven mostly by the Government’s insistence on massaging the data to bolster their performance or at least public perception of it. Wages growth has been particularly sluggish however as business investment has been shelved due to the uncertainty created by Brexit. This part of the employment report is expected to show a minor improvement possibly reaching 2.4% although a 2.3% would be an acceptable increase from 2.1% last month.

Inflation is likely to have risen to 2.8% on its seemingly inevitable rise towards 3%. Energy prices will be a major contributor in the wake of the Hurricanes to have hit the U.S. recently and are set to provide disruption weeks if not months to come.

Bank of England to retain slightly dovish outlook

The Bank of England’s Monetary Policy Committee will meet on Thursday to discuss and vote on monetary policy. Whilst a hike would have some effect on reining in inflation, its effect on both sentiment and current activity would be potentially harmful so a 6-2 vote in favour of the status quo is likely.

Mark Carney, the Governor, has been strident in his demand that data is looked at as a series concentrating on trend discounting any “outlying” data. His view on inflation has been and continues to be that economy is not providing any inflationary factors and it is therefore due to the continued weakness of the currency driven by Brexit uncertainty. This vicious circle won’t be broken any time soon as Brexit negotiations have barely started in earnest.

The vote over the Bill to repeal the act which took the U.K. into the common market in 1973 will take place later this evening. It is likely that the Government will win by the slimmest of margins but there will be further battles ahead for the Prime Minister and her team. Theresa May is gradually losing the confidence of her back benchers and a leadership challenge is a real possibility. The additional uncertainty this would bring would deal another blow to Sterling which is just about managing to hold its ground in the current political and economic climate.

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Dollar holding on as negatives recede

There is little doubt that the employment report issued a little over a week ago in the U.S. was surprisingly weak but traders who were already doubtful of a further hike in rates this year were prepared to overlook the data and it took a day or two for sellers to re-emerge and push the dollar index to lows not seen since January 2015.

There has been a marginal recovery of the greenback as the drivers have provided scant evidence of an increase in activity. The next release of Q2 GDP will be on September 29th and it is corporate profits that will be the major new factor. Given the fall in the dollar repatriation of profits should lead to stronger data although it is unlikely to exceed the 3% most recently reported.

This week will see the release of inflation data in the U.S. This is expected to remain benign which is causing concern to the Fed and putting a brake on further interest rate rises,

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