Strong employment report brings relief.
Fridays release of employment data drove a correction in the dollar as the index of its performance against the currencies of six major trading partners rose by more than 1% to reach 93.75 before falling back a little. 209k new jobs were created in July following an upwardly revision to Junes data from 222k to 231k. Employment data has been inconsistent recently with most above average reads being revised down.
It remains to be seen how much the weakness of the dollar has led to imported inflation. This week’s data, released on Friday will be closely watched as a provider of insight into the Fed’s next move.
With the oil price falling, although it has now recovered a little, a dampening of inflation pressure is expected but since oil is priced in dollars, currency weakness isn’t an issue.
The uptrend for the Euro against the dollar remains intact with strong support for the single currency close to 1.1600. However, the pound is under pressure following the MPC meeting on Thursday and further falls to 1.2880 and 0.9080 are a distinct possibility.
U.K. Rate hike no longer an option
Mark Carney, The Bank of England Governor has been firm in his view that the headwinds being created by Brexit uncertainty to the U.K. economy and the currency are real and need to be taken seriously. Carney is a “forward thinker” considering current trends only inasmuch as they will affect future activity. He has long been worried about the effect of a rate hike on the U.K. economy and, although not officially party to the Brexit negotiations, he will have been consulted over the Hard/Soft Brexit debate.
Looking back over the period since the previous MPC meeting on June 15th, it now seems incredible that a rate hike was being considered. Inflation remains a concern but economic activity is weak both currently as evidenced by Q2 growth despite a rise to 0.3% from Q1’s 0.2%. In its quarterly inflation report the Bank cut its growth target for 2017 from 1.9% to 1.7%.
High inflation is wholly imported being solely created by the fall in Sterling since the Brexit Referendum despite its subsequent correction. Concern therefore switches to the economy and benign wage growth leading to a fall in real wages.
Brexit now sole U.K. indicator
Over the weekend, one U.K. newspaper delivered the news that the U.K. was going to offer a “fee” of forty billion Euros to cover its departure from the EU. This figure, strongly denied by Ten Downing Street, is significantly below the amount that is both contractually due and the number expected by the EU.
It is most likely to be a “fishing expedition” started by the Government to get a reaction as to what to expect from EU negotiators once hard numbers are discussed. It will, however, bring further talk of hard Brexit and push back any hope of talks about a trade deal.
The Institute of Directors and the Confederation of British Industry have both come out in favour of a transition period between the March 209 deadline for departure and a final closing of the door. This is designed to allow firms to make necessary adjustments to employment policy and cost and to allow exporters to get used to new regulations.
Sterling has been hit but Brexit uncertainty, a probable widening of interest rate differential and a weakening economy. We have probably seen the high for the pound against the dollar and versus the single currency a test of resistance close to 0.9250 is possible.
