The pound has held firm this week as Prime Minister Boris Johnson has changed his tone as he seeks a new deal with the EU. The recent political developments have made it incredibly hard for Boris Johnson to deliver a “no deal” Brexit come October 31st and increases the likeliness of a new Brexit deal.
Parliament is now shut down until the middle of October to allow the government time to negotiate with the EU and find a way to improve the current offering. In the closing session of Parliament Monday night, a vote was passed by MPs to prevent a General Election taking place before October 31st, which has boxed in the Prime Minister. If Boris fails in his attempts to reach a new deal with the EU, he will look to prevent a Brexit delay without breaking the law, only time will tell if this will be possible. Boris mentioned… "I will go to that crucial summit on October the 17th and no matter how many devices this parliament invents to tie my hands, I will strive to get an agreement in the national interest. This government will not delay Brexit any further," added Johnson.
Average wages for the UK (inc bonuses) grew 4% in July, which was above market expectations of 3.7% and a fresh 11 year high. Also, 31k jobs were added on a three-month-on-three-month basis. This recent economic data should continue to support retail sales and Gross Domestic Product consequently. Positive figures like these would usually lend support to future interest rate hikes from the Bank of England however, the current political situation has dominated markets and until there is a material breakthrough with Brexit, interest rates are unlikely to change.
Investment bank TD Securities have drawn questions on Pound Sterling's ability to make further gains against the euro and USD, saying “the currency's inability to push higher following the release of some strong UK employment data was particularly telling.”
German Finance Minister Olaf Scholz said on Sunday the German government could come up with €50bn should the country fall on hard times to inject stimulus into the economy. The export focussed economy has faced difficulties due to the global trade disputes with US-China trade wars and Brexit. The German economy reduced by 0.1% in the second quarter of this year. Being one the EU powerhouses, any effect on the German economy may have repercussions for the EU and therefore could affect the euro’s value.
Italy’s renewed coalition plan to raise the budget deficit to 2.3% next year which could reignite tensions with the EU. The EU have threatened disciplinary procedures against Italy in the past and could prove problematic for the EU moving forward. Italy currently has the second largest debt burden in the EU as a proportion of GDP.
Fed Chairman Jerome Powell has recently commented on the healthy jobs market and economy in the US. Mr Powell is expecting a “continued moderate economic expansion”. Donald Trump has continued his pressure on the Fed to cut interest rates and Wall Street has priced a 90% chance there will be a 0.25% cut later this month (17th – 18th Sept) according to CME Group Data. If there is a cut, we could see US dollar weakness.
Key US-China trade talks have been scheduled for next month. Mr Trump has spent more than two years seeking a new trade deal with China. The discussions between the two economic powerhouses seem to be progressing however, things can change very quickly and will affect a number of economies who rely of US and Chinese trade.
Last week the Bank of Canada (BoC) left interest rates on hold and did not reference any potential cuts in the near future. Instead, they will base future policy decisions to the developments in the US-China trade war. James Knightley, chief international economist at ING has said, "Given Canada’s trade and commodity exposure and with little prospect of an imminent easing in trade and global growth concerns, we recently changed our view to a 30 October cut and that call remains valid."
The Canadian dollar is the second best performing G10 currency for this year, behind the JPY. The BoC lifted growth forecasts from 1.2% to 1.3% reflecting the stronger than anticipated economic performance of late. Central banks world-wide have been cutting interest rates or hinting towards a reduction, as momentum in the global economy has slowed, apart from the BoC.
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