Today’s macro highlights:
Political risk back in focus for GBP
Friday’s conciliatory tone from the government over Brexit may have always seemed too good to be true, so yesterday’s resignations by both Boris Johnson and David Davis were - perhaps to an extent - inevitable. This hasn’t however rattled the Pound too badly – yes, there’s been some selling, but with neither a leadership challenge or a general election on the table, losses have so far been limited. It does seem however that this is pushing the UK that bit closer to a hard Brexit. With such turmoil, no customs agreement will be struck, meaning an uncertain time for exporters. Inward investment decisions will also be delayed further and that nascent growth we’re seeing in the UK economy risks being quickly extinguished.
Aside from the very obvious political risk, the day ahead looks relatively quiet in terms of the fundamentals. The UK’s Office of National Statistics releases its first monthly assessment of GDP at 9.30am BST, as part of an overhaul of how this figure is calculated. Because it’s a first, there are no comparatives to use but critically the market will be looking for a positive print here. That should be as good as guaranteed, given the uptick in consumer spending that’s been seen in the wake of the Q1 lull and will help strengthen the case for a rate hike at the Bank of England next month. Higher interest rates will provide that much needed ability to stimulate the economy when the inevitable fall-out of Brexit is felt.
ZEW survey data is set for release at 10am BST and again the numbers will be under scrutiny. This provides some valuable forward-looking data over how the economy is faring and could provide further clues as to just how quickly the ECB can look to tighten monetary policy. Any indication that the bond buying programme will run into the New Year has the potential to put a stop to the Euro’s recent run of gains over the US dollar, although yesterday’s bullish assessment of the Eurozone’s economic prospects by Mario Draghi perhaps suggests that the wait to see a return to normalised monetary policy won’t be all that long.
The pair lost around one and a half cents yesterday off the back of Boris Johnson’s resignation and although we’re now off recent lows, the political uncertainty of what happens next is weighing on the Pound. A return to the year to date lows we saw at the end of June would be of little surprise..
Read across from Sterling’s sell off saw the Euro lose around half a cent against the dollar during yesterday’s session, but the downside has been limited. However, failure for the ZEW survey to impress could lead to another bout of selling here - the market really needs to see fundamentals reinforcing the idea that tighter monetary policy lies ahead.
The pair may have rallied on the back of David Davis’ resignation, but gains were comprehensively eradicated on the back of Boris Johnson’s departure. The pair is now heading back towards lows for the year and although any hints of a rate hike may help shore up the Pound in the short term, given the growing likelihood of a hard Brexit, the longer term picture looks increasingly bleak.