Rates on hold in G10

Mario Draghi is first up to justify the stance taken by the ECB as the Jackson Hole Central Bankers Symposium gets under way today. Draghi is unlikely to make any major policy comment although he could provide a timeline for the removal of extraordinary measures.

The market is now convinced that this will start in September and any deviation from that expectation could see the Euro correct its one directional progress. There has been no official guidance as to when the ECB will start to divest itself of the bonds bought to bolster liquidity and the September date has become something of a self-fulfilling prophecy.

As ever, the major focus of the Symposium will be a speech by Fed Chair Janet Yellen on Friday. She is more likely to provide advance guidance than Draghi and should she be perceived as more hawkish the dollar could correct significantly.

Traders have now returned to interest rate differentials real, expected and perceived as a major driver of the market and these events are just what they need to retain their fervour.

The dollar has recovered from last week’s, four-month low of 108.60 as risk has returned to the market following the quieting of North Korean rhetoric.

Brexit Protagonists move further apart

Too little too late! The Government has finally woken up to the fact that the EU were serious when they told the U.K. there would be no discussion about trade and customs until progress was made over three major issues.

The U.K. has now started “arguing with itself” producing a raft of discussion papers which don’t even approach a solution to the fate of EU citizens remaining in the U.K., the Final Brexit Bill or the Irish border.

Michel Barnier, the EU chief negotiator has now said that it is most unlikely that talks on trade can begin in October as insufficient progress has been made.

The pound continues to weaken against the Euro having now breached the 0.9150 support. The position against the dollar is a little more mixed as the greenback faces its own drivers and headwinds. As the London market opens traders could start to hunt for the stop losses of those traders who were trying to go cautiously long expecting a deeper correction from the strong support for the pound. If this happens 0.9220 is the next target.

The common currency is starting to recover from its recent correction versus the dollar but faces a struggle to move significantly higher given the divergence of interest rates.

Business Investment; a major Brexit Casualty

Why would anyone invest in a U.K. business if they had no idea what their terms of trade will be in the medium term? Headline makers like the major car manufacturers can demand heavy subsidies to remain within the U.K. following Brexit. However, the U.K. economy thrives and has done since the manufacturing base was debased on smaller businesses.

Small and Medium Enterprises are facing an uncomfortable future and their reticence to do any more than “tread water” until the picture becomes clearer is a major concern for the Bank of England and means that interest rates will remain on hold, possibly until after Brexit.

The economy is faltering, of that there is no doubt and the amount of hand-wringing in both Government and Financial circles is bordering on pathetic. It is almost as if the Government’s line is “well you wanted Brexit so you will have to face the consequences”.

The benign neglect facing the economy could easily become a recession. Traders will soon catch on to the next move in rates being lower and far from withdrawal of support, bond purchases could increase. The threat to the U.K. economy is no less serious than in 2008 so will need to be met with as much of a serious response.

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