Employment report to set short term path

U.S. Treasury Secretary in a speech yesterday attempted to talk the dollar lower commenting that “a weaker dollar was probably good for trade”. His backing for the President’s view that America’s trading partners were taking advantage of a perceived strong dollar policy to gain market share drive the dollar lower after it had started to form something of a base against the Euro and Sterling.

It had reached 1.1823 before bouncing back above 1.1900.

There had been talk that ECB members were concerned about the strength of the Euro and were considering slowing their discussion of the tapering of the Asset Purchase Programme. However, there was no official word. It is unlikely that the ECB would have leaked such a view given the recent comments of Ardo Hansson and President Draghi’s pointed refusal to comment in recent speeches.

Today sees the release of the August employment report in the U.S. it is unusual for it to be released on the first day of the month and this leads to a feeling that it may be even more inaccurate than normal. A headline of more than 200k new jobs will set the dollar index on a deeper correction as it is likely that given the rest of the recent data, particularly the stronger than expected Q2 GDP, that the FOMC will seriously consider a further hike in rates this year.

Sterling continues to suffer Brexit blues

It should be clear to the market by now that Brexit is going to be a long and painful process as both sides continue to blame the other for lack of progress. Yesterday EU Chief Negotiator Michel Barnier was quoted as saying that the U.K. does not feel legally bound to accept its obligation to fulfil its financial obligations. David Davis countered by calling on the EU to adopt a more imaginative and flexible approach.

These comments, while wholly understandable do nothing for U.K. businesses anxiously awaiting hard facts on how Brexit will affect them. While they wait they keep investment plans firmly under wraps creating a potentially catastrophic slowdown in the U.K. economy.

It is perhaps ironic that Michael Saunders, a hawk on the Bank of England’s Monetary Policy Committee, chose yesterday to reiterate his view that rates will have to rise in the U.K. sooner rather than later to avoid much larger increases farther down the road.

The MPC meets in two weeks and although inflation data for August won’t have been officially released members will have received advance guidance. A hike in rates is completely off the table so it is likely that Saunders comments were designed to bolster the pound which last month had its worst single month performance since October.

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Return of Parliament possibly beginning of the end for May

Rumours are already starting to circulate that backbench Conservative Members of Parliament have zero confidence in the ability of Theresa May to win the next General Election whenever it is held. These rumours are in response to a speech by the Prime Minister in which she reiterated her expectation that she is “around for the long haul” and fully intends to continue in her role despite her shaky performance leading to the loss of the Conservative majority in Parliament.

Political instability is just another of the factors affecting the performance of the pound. Having reached close to support at 0.9330 earlier in the week, it has managed to regain a little composure trading as high as 0.9186. The unfounded rumours of ECB discontent with the strong Euro contributed since there is very little reason to feel anything other than negative towards Sterling as the fourth quarter approaches.

Industrial and manufacturing data is released next week. This should confirm the weakness of the economy held back by businesses shelving investment plans while Brexit remains clouded in rhetoric and disagreement.

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