Waiting for the fog to clear

​​​​​​Today's news headlines:

  • ‘No-deal Brexit “a last resort”, concedes Johnson’. Boris Johnson is beginning to position himself for the leadership bid by presenting a more progressive approach than he has wielded in previous times. This new nuanced position is an attempt to leave himself manoeuvring until the last possible moment. (Financial Times)
  • ‘ECB frustrated as markets call bluff on stimulus’. The market reaction to the European Central Bank’s (ECB) hint at upcoming action has been distinctly muted compared to previous occasions. The argument of the reduced efficacy is between lack of credulity over the central bank’s capacity for further purchases, or perhaps the passing of the Presidential baton has put markets in a wait-and-see stance. (Financial Times)

How to solve a problem like (not) Brexit

We’re almost three years on from the UK’s vote to leave the EU, and it’s farcical that no credible withdrawal plan exists. Under normal circumstances, Bank of England policymakers would strongly consider raising interest rates above 0.75%; however, they’re the latest casualty of political ambiguity. Fundamentally, the labour market continues to tighten—growth in basic pay climbed to 3.4% in the three months before April—unemployment stands at 3.8%. Breaking this down, workers have a strong wage negotiating position in a tighter labour market, but productivity gains are barely perceptible. The result? Firms are forced to raise prices to offset the cost of higher wages. With the no-deal rhetoric ringing loudly around Whitehall, it would be a risk for the BoE to tighten monetary policy; Mark Carney’s right to wait for the fog to clear. His colleagues aren’t so sure, though. Earlier this week, Michael Saunders stressed that the BoE doesn’t need to keep rates on hold until all Brexit uncertainties are resolved, adding that interest rates may need to rise faster than markets expect.

Bottom line: Central bankers can’t solve the problem of Brexit and shouldn’t aim to do so. Clearly, inflation forecasting is particularly difficult under the current uncertainties but as credible markers of an overheating labour market appear, can the BoE ignore its obligation. We could see the Pound jump if policymakers feel obliged to raise rates before parliament gets its act together.

Gaseous Tweets

When Trump threatened trade sanctions against both China and Mexico, market tensions seemed at their highest, causing a substantial flight to safety. Last week, the more dangerous Mexican trade front was resolved, producing a collective exhale from markets. Overnight, Trump criticised German Chancellor Angela Merkel’s support for the Nord Stream 2 gas pipeline between Germany and Russia. On the surface, this was prompted by a fear of a German-Russia show of solidarity, but beneath that, it appears to be calibrated to block Russian gas in favour of US light natural gas imports. Equities have since dropped off, and Treasury yields moved lower again, but the move is modest in context, which speaks to the longevity of this current show of aggression. The effectiveness of the tariff strategy against Germany—which is an entirely different trade relationship than China—isn’t at all clear. German auto tariffs have been threatened previously, so with Mexico a notch on Trump’s belt, he may be re-picking an old fight.

Bottom line: Germany is the new victim of Trump’s sanctions as support for the Russian gas pipeline is criticised. So far, the market reaction has been muted with the Euro Index at monthly highs and the Dollar Index only recovering from this month’s fall. Should the new trade front develop, risk appetite will likely wane, causing the Dollar to appreciate back to year-to-date highs.


The Pound continues to register new lows, but it would be fair to say the first half of June has been sideways in movement due to the narrow range. The US Dollar has rebounded from the recent sell-off and seems well supported at the trade-weighted 200-day moving average. The pullback in oil may be a contributing factor.


The drift lower has been arrested for the time being given the cap in EUR momentum due to the risk-off shift. The current level isn’t particularly meaningful so this pause may easily continue with a brightening in market sentiment; now all we need is a positive catalyst.


The EUR, having made gains since the turn of the month, was rebuffed at the trade-weighted 200-day moving average. Given the shift to a more risk-off stance overnight, it appears to be a pause in the common currency’s rally. The US Dollar has recovered somewhat, so the net result for EUR/USD is supported at the 100-day moving average and potential gains if Trump’s threats prove to be enduring.