Just great!

We wish we could write how relieved we are that Boris Johnson is ‘marginally more optimistic’ about a Brexit deal after his weekend in Biarritz, but it’s hard to share his optimism, especially since the Financial Times has reported:

‘The majority of British boards expect the UK economy to deteriorate over the next 12 months as the combination of Brexit, trade wars, and consumer slowdown begins to affect the countryTwo-thirds of FTSE 350 company secretaries expect the UK economy to decline, with almost 60 percent saying their companies would be damaged by any form of Brexit. About 8 percent said Brexit would lead to “significant damage”.’

Ironically, the other thing the business community are agreed upon is how frightening a Labour government might prove under Corbyn leadership. When polled by the FT-ICSA Boardroom Bellwether survey, approximately 80% of respondents indicated a Labour government would prove ‘not’ or ‘definitely not’ business-friendly.  So, we are de facto between a rock and a hard place.

Even if the UK leaves with a deal on October 31st, don’t necessarily expect an automatic interest rate hike at the Bank of England. Economic deterioration signalled by both Purchasing Managers’ Index survey data and lagging economic indicators suggest the uncertainty may have been too prolonged for the UK economy to spring back quickly. Unlike the US economy, where fixed-rate mortgages are a prominent fixture of the housing market, the UK is primarily a variable rate mortgage market and much more sensitive to interest rate moves at the central bank. Certainly, upsetting the housing market is a big concern for the BoE because houses are the single largest asset for most people. But worse still, any increase in interest rates results in higher mortgage payments and comes directly at the cost of consumer spending at a time when the consumer is single-handedly keeping the UK economy afloat. 

Bottom line: The BoE has a tough set of months ahead waiting for the outcome of the Brexit debacle and few tools left at their disposal to combat flagging business investment. We wouldn’t expect a massive hike under an orderly scenario either, because the inflationary impact might be deemed more ‘transitory’ than a potential upending of consumer spending. Our view of a strongly bimodal Sterling outcome—a massive move one way or the other—remains the central scenario.

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Source: Financial Times

GBP

Last week, the Pound extended its August rally breaking through 1.2200 against the Dollar and 1.1000 against the Euro. Mixed opinion on monetary policy from the Federal Reserve and hopes that a no-deal Brexit will be avoided lifted the currency. There are no significant UK data releases this week to move the Pound.

EUR

Last week, the Euro hovered around 1.1100 against the US Dollar before rallying to 1.1150 on Friday due to the Fed having mixed views on future monetary policy. This momentum has since run out, and with a light week ahead for Eurozone data, the common currency may trade flat again without significant headlines emerging.

  • Survey data will be released on Thursday; Economic Confidence, Industrial Confidence, and Services Confidence will be out at 10am. The expectation is a slight deterioration across all surveys.
  • Friday will be the most notable day of data for the Eurozone as unemployment and Core Consumer Price Inflation data is scheduled. Unemployment is expected to remain unchanged at 7.5%, and year-on-year Core CPI is forecast to tick higher from 0.9% to 1.0%.

USD

On Friday last week, the Dollar Index dropped off following Fed officials’ mixed stance on US monetary policy. The index has since recovered and continues to trade above its 200-daily moving average – a consistent trend so far this year. More notable US data will be released toward the end of this week.

  • US annualised GDP growth will be out on Thursday afternoon, and the expectation is a fall to 2.0% down from 2.1% in June.
  • Friday will have the Fed’s preferred inflation measure – PCE Deflator and forecasts suggest a slight uptick month-on-month to 0.2%. An inflation reading that defies the expectation one way or the other could force Fed officials to align views on US monetary policy.
  • Also, on Friday, data on the US consumer will be published; the consumer is a key component of recent US economic strength amid a deteriorating supply chain. Personal Income is expected to fall to 0.3% while Personal Spending is expected to edge higher to 0.5%.

All content is written by the Global Reach Trading Desk. The opinions expressed are not the view of Global Reach Group and are not intended as investment advice.