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Quiet start to week as markets digest Brexit progress

Today’s macro highlights:

  • EUR - German Exports (May)
  • EUR - Mario Draghi addresses European Parliament
  • USD - Consumer Credit (May)

Quiet start to week as markets digest Brexit progress

Friday saw meaningful gains for both the Pound and Euro against the dollar as markets digested both the latest US unemployment number and the apparent progress made by Theresa May in agreeing common ground with her government over Brexit. Across the Atlantic, the unemployment figure rose from 3.8% to 4% which provided some cause for concern, although this came against a backdrop of significantly more people moving into the labour market. As such, there’s an argument to say that any weakness here may be a little misplaced. Closer to home, The Prime Minister held key talks with Cabinet Ministers on Friday over finding consensus on a post-Brexit customs deal. This has been billed as business-friendly and has taken a long time to deliver. There’s arguably something for the Pound to cheer here, although the key point is now trying to get the other 27 members of the EU to accept the proposals. No surprise that upside for Sterling has been rather short lived.

We’ve also just received the news of David Davis’ resignation. The Brexit secretary is clearly not impressed with the compromise agreement which was reached on Friday and he believes it will leave Parliament in a very bad position when it comes to finalising a deal. The markets have - so far - been relatively unmoved, with the clarity of at least having a proposal lending support to the Pound. However if we see more ministerial resignations forthcoming - and perhaps talk of a leadership challenge - then expect Sterling to be in for a volatile spell.

German export data for May is has just been released this morning and this comprehensively beat expectations, coming in at a 1.8% increase, well up from the expected 0.7%. The figure has been well received and it adds weight to the fact the ECB is moving towards a position where monetary policy can be normalised. However, the fact this is ‘aged’ data detracts from its significance to a degree and it doesn’t reflect those US trade tariffs which are now being rolled out.

Regardless, an upbeat figure here will likely be well received - Germany remains the economic powerhouse of the Eurozone, so continued growth here is vital if the ECB is to start normalising monetary policy.

Keeping with the Euro, Mario Draghi addresses the European Parliament’s Economic and Monetary Affairs committee at 2pm BST, where he will present the central bank’s perspective on economic and monetary developments. The key point to watch for here will be any clues over the timing of wrapping up the ECB’s bond buying scheme - we had seen suggestions that this could be concluded this year, although economic data has started to disappoint on occasion. Any suggestion that the QE programme will continue into 2019 will likely prove negative for the Euro.

8pm BST sees the latest US consumer credit reading and any slowdown here could be reflective of waning confidence in the economic outlook. Expectations are for a meaningful rebound from the April figure, but failure to deliver here could once again pose questions over whether the Federal Reserve can manage two more rate hikes this year without damaging growth.

The pair is trading at levels not seen since mid-June, fuelled by optimism of a Bank of England rate hike and that consensus position over Brexit. However, the remaining European Union member states still need to ratify the proposals - gains could well prove short lived.

We’ve seen two and a half cents added to the pair since the end of last month as opinions strengthen over the concluding of the ECB’s bond buying package. Mario Draghi’s words today will be closely watched in this regard as any note of caution could initiate a reversal.

The pair gapped higher as the week’s trade got underway with gains for the Pound off the back of that apparent Brexit progress. However, the upside proved short lived - the real test here is how well received the idea is by the other member states.