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GBP falls on ministerial resignations

Published: Wednesday 11 July 2018

  • European Central Bank (ECB) releasing ‘Dovish’ meeting minutes
  • US tariffs on China of $500b?
  • Canadian interest rate decision
Well, what a week it has been! We’ve seen shock results, the unexpected departure of star performers and some desperate defending – not just in the World Cup, but on the UK political front, too. The country’s upbeat mood in reaching the World Cup semi-finals today (Wed) and any goodwill transferred to the Pound, particularly if England reach the finals, has been shattered by the fall-out from last week’s vital Chequers summit and the resignations of ‘big beast’ ministers Boris Johnson and David Davis. Will a no-confidence vote in Prime Minister Theresa May follow? Is football coming home? We will find out more in the next week!

GBP falls on ministerial resignations

So, Brexit Secretary David Davis and high-profile foreign secretary Boris Johnson have resigned over the Chequers proposals on trade as Britain leaves the European Union in March 2019. Prime Minister Theresa May could face a vote of no confidence and a leadership challenge, which may ultimately bring down the minority government. All that is likely to weigh on the Pound and see it fall against major pairings. In contrast, there was some good news on the economic front in the last week, with Gross Domestic Product (GDP) rising by 0.3% in May, 0.1% faster than the previous month.  And there could be a short-term feel-good bounce in the value of GBP if football does come home and England win the World Cup!
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European Central Bank (ECB) releasing ‘Dovish’ meeting minutes

The European Central Bank is set to publish its Monetary Policy Accounts tomorrow (Thur), which should shed light on its reasons for its ‘dovish’ announcement in June that it was ending its Quantitative Easing (QE) programme and expecting to keep interest rates on hold until Summer 2019. It will also be interesting to see the ECB’s views on how the US trade tariffs are likely to affect Europe and how the Euro reacts.

US tariffs on China of $500b?

The United States has now begun its trade war with China by imposing a 25% tax on imports of $34 billion of 818 Chinese goods – and more could follow, with a possible $16 billion mooted to make a total of $50 billion. However, President Trump has said that ultimately tariffs could reach a staggering $500 billion. So far, the Chinese have retaliated in kind to the first measure and have imposed 25% tax on imported US goods including cars, soya beans and lobsters. It is too early to say how the US economy and the US Dollar will be affected, but each move in the drama is being watched with concern.

Strong jobs gain, though employment falls

This week’s excellent US employment news, with the creation of 213,000 jobs in June, which was 18,000 more than expected, supported the US Dollar, which has been steady against most majors. Although, at the same time, with an extra 601,000 people returning to work, the jobless rate rose from 3.8% to 4%. Although, it must be said, it is still a 17-year low. Plus, there are still 6.7 million job vacancies. In addition, annual wage growth was lower than expected at 2.7%, with inflation at much the same rate, allowing for little increase in consumer spending. Tomorrow’s (Thur) inflation report will make interesting reading and will be a factor in whether the Federal Reserve (Fed) chooses to raise interest rates again at the end of the month.

Canadian interest rate decision

The Bank of Canada is expected today, (Wed) to raise interest rates. With strong economic data and rising inflation above the 2% target, expectations are that Bank of Canada Governor, Stephen Poloz, will increase the present 1.5% rate by 0.25%. However, with the US/Canada trade war underway and no new North American Free Trade Agreement (NAFTA) deal in sight, Mr Poloz may decide to continue with a more prudent approach.

Australian business confidence slips

The latest survey from National Australia Bank shows business conditions improved to +15 after falling sharply in May. However, confidence fell slightly to +6, which has been the pattern over the last few months. As a result, the Australian Dollar weakened a little, but FX markets are more concerned at the moment with how the US trade tariffs will affect China and, in turn, Australia.

… but NZ business outlook is even worse

The Kiwi made brief gains against Sterling following the Brexit ministerial resignations, but the pressure is still on the NZD generally, with particularly concern about whether the US/China trade war will spill over and damage the NZ economy. Business confidence – much more fragile than in Australia – is already at a seven-year low, due to worries over skills shortages, a rise in the minimum wage and the plan to ban foreign homebuyers.
What to watch out for next week…

The Bank of Canada meets today (Wed) to decide interest rate policy. Thursday sees the ECB minutes published that should tell us more about why it ended QE and plans to hold rates. Any more ministerial resignations in the UK or threats to Theresa May’s government is likely to see more movement in the Pound, while new developments in the US trade war will also be a catalyst for change. Then, on the sporting front, there is the little matter of the World Cup final.
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