No pressure, MPC!
Today's news headlines:
- ‘Tories warned no-deal Brexit carries “real risk” of United Kingdom break-up’. David Lidington, the Prime Minister’s deputy, has provided details of regional sentiment and policy direction, which means a disorderly Brexit could materially increase the risk of a UK break-up. (Financial Times)
- ‘US approves $2bn arms sale to Taiwan’. Just as the US-China trade dispute seems to be making new inroads, the US has approved a $2bn arms sale to Taiwan. This provocative move appears calibrated to counter the Chinese, who recently attempted to increase the pace of the Hong Kong absorption via Carrie Lam’s extradition legislation. (Financial Times)
UK’s make or break data release
In recent weeks, worsening UK economic data has caused a headache for the Bank of England (BoE) which has reiterated for months that monetary policy will remain steady until the future of Brexit becomes clear. Purchasing Manager’s Index (PMI) data—a leading indicator of economic health across different sectors—disappointed when the latest construction figures showed the biggest contraction since 2009. This reading in conjunction with April’s significant contraction in Manufacturing and Industrial Production figures may provide a good enough reason for the Bank of England (BoE) to reconsider its monetary policy stance.
In today’s schedule, May’s Manufacturing and Industrial Production numbers will be released, and the expectation is a bounce back into positive territory. The last round of production disappointments were attributed to a rundown of so-called ‘Brexit stockpiles’ that were accumulated before the UK’s initial Brexit date in March. If this is the case, the BoE can breathe a sigh of relief and continue with their ‘wait-and-see’ monetary policy stance. However, another round of dismal data and the UK central bank may be forced to reconsider joining the dovish central bank club.
Bottom line: Given the ongoing race for Number 10, there is no prospect of fiscal policy support in the near future, so the BoE is, not for the first time, acting alone to stabilise the economy. As the global economic backdrop wavers between expansion and stagnation and then back again, accurately resolving domestic output is a tall order. No pressure, Monetary Policy Committee!
Is there any route to a Brexit resolution?
Yesterday, MPs signalled that they would not allow the next UK Prime Minister to pursue a no-deal Brexit without firm opposition. Parliament passed a motion to stop the UK’s future leader from withdrawing from the EU without a deal, against their wishes, while the Labour Party also committed to oppose any Brexit plan in favour of a second referendum. It’s a clear warning to both Boris Johnson and Jeremy Hunt that majority support for a disorderly departure simply doesn’t exist in UK politics.
While he’s the clear favourite to succeed Theresa May, Johnson’s Brexit strategy will never fly with Parliament, so why would the EU take the threat of a no-deal seriously? They wouldn’t, and that’s why the EU is unlikely to renegotiate the current deal, which has Parliament deadlocked. The UK may have moved its departure date from April Fools to Halloween, but the dim prospect of a resolution is no joke. Since the June 2016 referendum, the Pound Index has fallen almost 18% and the dominance of political dysfunction over worsening fundamental data could produce further weakness.
Bottom line: Assuming that Labour fails to endorse any Brexit deal and Parliament rejects a no-deal exit, the UK will be left with either a second referendum or a general election. In this scenario, the UK’s chosen route will be key for the Pound. Perhaps the combination of a Corbyn government combined with remaining as part of the EU is more Pound positive than a compromised EU split under a more traditional Tory government.
Both US appreciation and Sterling depreciation continue unchecked. Today’s main event will be the testimony of Fed Chief Jerome Powell, who is expected to signal mild easing despite last week’s strong Non-Farm Payrolls data. The pair, having breached December 2018 lows, is firmly at the top of post-referendum trading ranges which extend down to circa 1.2050.
Unlike Sterling, the Euro Index has maintained a relatively tight trading range. Despite continued Dollar ascension, the EUR has found support and is making small steps towards the 100-day moving average resistance level on a trade-weighted basis. The pair continues to drift lower, given Pound fragility and lack of positive economic data.
The Dollar rally has brought the pair back to the bottom of the six-week trading range and within spitting distance of the two-year low. The trend of the past year has been a gradual downward trajectory, and given the Dollar’s dominance, there is little to suggest it will halt here.