Sterling rates have been climbing recently as the probability of a no deal exit from the EU at the end of October falls. Data from the UK seems to be supporting the view that the uncertainty about its future relationship with Europe is impacting its economic health.
Inflation in the UK fell to 1.7% in August, its lowest level since 2016. Last week the Bank of England did not follow the strategy of other central banks in cutting interest rates, and instead kept them unchanged at 0.75% but hinted a future cut could happen if uncertainty persists.
Last week the UK had discussed ideas to replace the challenged Northern Ireland backstop with the EU but has not yet submitted written proposals. Timelines however remain stretched as the Finnish prime minister Antti Rinne, said the UK should submit written proposals by 30 September otherwise “it’s over”.
This was further suggested by the EU with their Chief Brexit negotiator, Michel Barnier, saying on Monday that “based on current UK thinking, it is difficult to see how we can arrive at a legally operative solution, which fulfils all the objectives of the backstop”. The final EU ministers before the end of October is set for the 17th in Brussels.
The latest turn in Brexit is the legal decision from the Supreme court which concluded that the PM’s decision to suspend Government for 5 weeks was unlawful. Boris Johnson was in New York yesterday but following the decision has now had to return to Westminster which will re-open again today. In the eight weeks that he has been at number 10 he has stretched most boundaries but with the latest being this legal decision suggesting he may well have misled the Queen it may be a stretch to far. What is worth noting is that following yesterday’s decision the odds given by book makers have shortened on Johnson going by the end of the year, betting site BetFair Exchange has Boris to leave in 2019 as 10/11.
Bloomberg suggested that he could well use the crises to try and persuade parliament to trigger the election that he says he wants.
GBPEUR rates are once again sitting close to a three-month high and touched near 4 month highs in yesterday’s market when looking at the interbank exchange rate this week following UK Brexit updates.
Generally European economic woes continue as this week Services data came out on Monday showing a poorer figure than expected, data came out at 52 from a projected 53.3. (Any reading over 50 is seen as positive).
This week Mario Draghi, the head of the European Central Bank (ECB), said that the eurozone economy faces a much more “prolonged sag” than was expected even a few months ago. Mr Draghi’s was speaking this week on the same day that a key business survey suggested that the eurozone’s economy was close to stalling. The purchasing managers’ index (PMI) for the EU showed a low figure of 50.4 for September which was the lowest in six years.
A worrying sign from Germany have also been highlighted this week. On Monday German Manufacturing data was released and showed a number of 41.4, when a number under 50 signals a contraction. This was the lowest level seen since June 2009 as demand overseas falls for German manufacturing. One of their largest parts of their economy is the motor industry which has been hit by a slowing global growth and the fallout from the US-China trade tensions. As Germany is the eurozone’s largest economy this could well have long standing impacts on the value of the euro as a whole going forward.
On Friday consumer confidence data for Europe is released as a whole and FX STREET expected to see further contractions.
US President Trump, who has been outspoken about interest rate change, labelled the Mr Powell, the head of the FED a “terrible communicator”. He went on to say he was “very disappointed” and tweeted on Sunday saying that he wants the FED to put lower interest rates further to below zero.
On Thursday of last week, the cost of buying US dollars dropped to the lowest level since the beginning of July, when looking at the interbank exchange rate. This was following the Federal Reserve (Fed) decision to cut interest rates. They were cut by 0.25% and the Fed went on to signal that further cuts could well be made if the economy starts to slow down.
“We should always be paying less interest than others” he went on to say, suggesting that further cuts may well be on the cards for the world largest economy.
In other news it is worth highlighting that the Fed has pumped more that $200 billion into the financial system to support liquidity recently. Liquidity issues were one of the ‘warning shoots’ with the financial crash in 2008 so something to continue to be aware of moving forward.
US data to be aware of is the key Gross Domestic Product (GDP) data released next Thursday afternoon. This will be keenly watched as an indicator of the overall performance and health of the world’s largest economy. Any sign of contractions or a slow in growth could well increase the possibility of further interest rate cuts going forward.
Yesterday morning we had the latest update from the Reserve Bank of Australia (RBA) chief Philip Lowe who said that the economy is at a ‘gently turning point’ The bank has left the possibility of cutting interest rates in the future a possibility. The RBA meets next Tuesday and is a key event for anyone with AUD position in mind.
The bank confirmed that there has been “no growth at all in consumption per person” over the last year. The RBA lowered rates in June and July of this year and Lowe said they were opening to lower again if the data supported it. They have however also highlighted that GDP figures in the first half of 2019 were higher than that in the last 6 months of 2018 and that they expected “a further modest pick-up” in the quarters ahead.
Bloomberg reported that traders have priced in a 63% chance of a cut in next weeks October meeting and a 85% chance in November.