The Brexit home stretch

Today's news headlines:

‘Draghi ignored in-house ECB advice on QE restart’. According to three European Central Bank Council members, President Mario Draghi ignored the monetary policy committee’s advice against resuming bond purchases. The rare event of not following the committee’s recommendation has surfaced as opponents of looser monetary policy put pressure on Christine Lagarde to change course when she takes over on November 1st. (Financial Times)
‘Johnson and Varadkar to meet in last-ditch bid for Brexit deal’. UK Prime Minister Boris Johnson will meet with Irish Prime Minister Leo Varadkar today as they try to find a compromise on the Irish backstop issue. The meeting needs to be productive if the UK is to reach a deal with the EU before the October 31st deadline, particularly as negotiations with the EU turned sour following accusations of a ‘blame game’ taking place. (Bloomberg)

Follow the leader

Last week we wrote about the trifecta of poor UK Purchasing Managers’ Index (PMI) data releases and how they augur a decline in UK economic prospects. Let’s refresh our collective memories to set the scene; UK Manufacturing PMI came out at 48.3, UK Construction PMI came out at 43.3 and UK Service PMI—making up around 80% of the UK economy—came in at 49.5. Bear in mind, a reading below 50.0 means the respondents, on average, believe the industry dynamics are deteriorating. To be balanced, let’s acknowledge that PMI surveys, while primarily cataloguing assessments of economic factors, also capture something more intangible, sentiment. Therefore, you might receive an overly pessimistic reading due to emotionally charged events, like Brexit, detracting from the reality on the ground.

To confirm the readings of forward-looking indicators, like PMI, we really need to look at the trajectory of backwards-looking economic readings like GDP growth, Retail Sales, or Business Investment data. Well as of last week, cumulative revised Business Investment since the beginning of 2018 has been -2.8%, and the final Q2 GDP was -0.2%, the first decline since 2013. This doesn’t paint a compelling picture for the UK outlook as we head into the Brexit ‘home stretch’ (the third such by our count).

Today we’ll have a whole slew of ecostats to continue the conversation, which might provide a more up-to-date assessment of the UK’s key sectors.

Due out today:

Month-on-month GDP reading
Manufacturing Production
Construction Output
Index of Services
Industrial Production

Not surprisingly, all of these are forecast to be worse than previous readings.

Bottom line: None of this should be terribly shocking given that we have previously reported the change in the Bank of England’s assessment, that irrespective of the flavour of Brexit, we’ll most likely require stimulus to support inflation and bolster business activity. More interesting is the interplay between these economic pronouncements of doom and the Pound trade-weighted index, which is supported at the 50-day moving average. Sterling trading is primarily capturing the Oct 31st political positioning rather than registering much of the eroding economic foundation. The market has priced in a short delay to the UK’s exit, which means the decline will go unscrutinised until the event has passed, and then it’s anyone’s guess where we’ll end up.

GBP/USD

Following Tuesday’s close below the 50-daily moving average for the first time in a month, the pair has found support at the 1.22 figure. Yesterday, rumours of significant EU concessions emerged, pushing the pair to 1.2290, before returning below 1.2220 when the rumours were squashed. Investors will be anticipating Johnson and Varadkar’s lunch-time meeting today and may cause the pair to break the 1.22 support level or climb back to 1.2300.

GBP/EUR

The pair broke through the 1.1111 support level (the inverted equivalent is 0.9000) on the London open this morning as the trade-weighted Euro Index inched closer to its 50-daily moving average. With little in the way of European data, news of key Brexit developments is likely to remain in the driving seat for the pair throughout the day.

EUR/USD