Knives being sharpened

The U.K.’s right of centre Conservative Party doesn’t have the best track record of accepting leaders who do not provide election victories.

The result of last week’s election was the worst possible outcome for all concerned. For the U.K. it threw up total chaos when a settled and forward-looking Government was needed to deal with Brexit. For the EU, it provided the possibility of a “change of opponent” halfway through the fight.

The Conservatives are not sure whether to throw everything out and start again while the opposition Labour Party know that despite a stellar performance from their side and the abysmal campaign run by the Conservatives, they still don’t have sufficient support to win an election.

Theresa May intends to form a minority Government. That never seems to go well. Support from the Democratic Unionists who hold extreme values and possible links to Unionist Terror Groups should guarantee the Queen’s Speech and a Budget are passed but how the political map will look in six months is anyone’s guess.

Sterling supported by liquidity and Commercial buyers

A feature of the performance of the pound in recent times of stress has been the withdrawal of liquidity leading to “flash crashes”. Fortunately, there was ample liquidity on Thursday night and into Friday to ensure that after an initial fall, Sterling has recovered a little adding to the confused state of the market. There is strong support at 1.2620 but it is against the Euro that volatility is set to rise.

Brexit in disarray

Angela Merkel, the German Chancellor, couldn’t resist a comment on the Brexit negotiations given the newly stable political picture in the Eurozone. She stated that the EU is ready to start negotiations and following the U.K. election could see no reason for a delay.

It is likely to be a feature of the negotiations that politicians continue to have their say on certain contentious points and the time that is being taken to each agreement. Messrs Tusk and Juncker are already interfering in Michel Barnier’s preparation. It is a feature of the Eu that they indulge in “collective decision making”. They seem to spend more time reaching a decision than implementing it!

Theresa May has confirmed that she intends to start the Brexit negotiations next Monday but how long she will be in “running the show” or even if she will be there to open proceedings is anyone’s guess.

Interest rate decisions provide contrasting view on economies

There are meetings of the FOMC in the U.S. and MPC in the U.K. this week as a useful diversion away from politics.

In the U.S., the FOMC is likely to raise rates, possibly drawing criticism over not having allowed sufficient time for the two previous hikes to have had an effect. The Fed is determined to stay “ahead of the curve”. President Trump, critical of the Fed during his campaign over their delay in returning monetary conditions to normal, has performed a “volte-face” and is now concerned that they are choking off the recovery.

In the U.K. The Governor of the Bank of England, Mark Carney faces a Parliamentary Committee today to explain why inflation is at 2.7% versus the target of 2%. Mr Carney, of course, has readymade responses following the fall Sterling following the Brexit referendum so he faces a relatively comfortable ride.

At the MPC to be held later in the week, the members will already have access to the latest release of inflation data. The best that can be hoped for is for inflation to have remained unchanged in May.

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