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July 2016

Sterling settles as Article 50 delayed

Published: Monday 18 July 2016

  • Sterling settles as Article 50 delayed
  • Monday's diary is like Mother Hubbard's cupboard
  • UK data and ECB are the week's highlights

EU leaders are apparently mulling over whether they can force the UK to invoke Article 50 and get on with the Brexit negotiations after the new Prime Minister said she needed to convince Scotland before she would get the Brexit plans underway. Theresa May is an intelligent woman; she knows that isn't going to happen. So is this her 'get out clause'? She was, after all a Remain voter if not much of a campaigner. We shall see. Or maybe, this is the delayer that allows Britain the time to negotiate trade deals with the reported 12 other countries before the EU negotiations get underway. That would be a sensible move and give Britain a much more effective negotiating stance. Either way, the Pound remains above its lows and relatively sanguine after the turmoil of the last month. Whether it will stay that way after BOE member, Gertjan Vlieghe expressed an immediate need to cut rates and further QE is another matter.
We heard overnight that New Zealand's inflation rate remained unchanged in Q2 at 0.4%. As with most countries, there is very little inflation at the consumer end of things and the strengthening NZ Dollar will lower that still further. It leaves space for the Reserve Bank of New Zealand to cut the base rate without an automatic inflationary effect, so that may well be their next move. The Kiwi Dollar is hovering around 1.86 to the Pound; above recent lows but well below the pre-Brexit vote levels.
Last week's US data added weight to the reasons for the US Dollar to strengthen. Retail sales are still buoyant, Q2 GDP growth was unrevised at 2.9% and even industrial production was broadly stable. The US authorities remain nervous over the Brexit effect on the UK and Europe and that has stopped the USD from gaining further strength over the last few days. However, St. Louis Fed President James Bullard is calling for immediate interest rate hikes based on his fears over the risk of overheating in the economy. With so many potential banana skins in front of the global economy, I think you would need to be very long-sighted to see that kind of ebullience in the US economy but maybe he knows something none of us do.
This week starts with an almost empty data diary for Monday but things heat up as the week progresses. The UK diary brings us inflation, government borrowing and unemployment data. Most is expected to be largely in line with previous months but the purchasing managers indices will reflect the nervousness British businesses are feeling over the Brexit vote. Quite how poor that is will determine the direction of the Pound this week. The bid for Britain's ARM from Japan's SoftBank could be a market mover. £24.3 billion is the bid and there may yet be counter offers from other big tech companies.That kind of one way flow of funds is sufficient to move the Pound, so it shouldn't be underestimated.
European traders will be more concerned with the European Central Bank's interest rate decision and press conference due on Thursday. No change is expected to the already 0.0% base rate but the ECB may be forced to take more extraordinary measures to try to keep the Eurozone on track whilst the Brexit problems play out. Strife in Turkey and another senseless grotesque atrocity committed on French soil will add to the overall air of tension and that is not good for commerce. The Euro has yet to react to the threat of the UK removing its financial support for the EU but that will come.
The week ends with Canadian retail sales and inflation data. Rising inflation but no growth in shopping mall activity is forecast and that would worry Canadian investors. The CAD is tracking the USD to some degree, so this may not move the currency instantly but it will affect sentiment and that has a longer term effect.
And the heatwave due to hit Britain over the next few days will undoubtedly bring the term 'hottest since....' to the fore in news reports. So, just for the record, the highest recorded temperature in the UK was in Faversham in Kent on 10th August 2003 at 38.5 degrees centigrade. That's 101.3 on the Fahrenheit scale. Come on Carol Kirkwood, Bring it on.
Tommy Cooper jokes

  • Two blokes walk into a building. You'd have thought  one of them would have seen it.
  • I went to the butcher's the other day and I bet him 50 quid that he couldn't reach the meat off the top shelf. He said, 'No, the steaks are too high..'
  • My friend drowned in a bowl of muesli. A strong currant pulled him in.
  • Our ice cream man was found lying on the floor of his van covered with chocolate and strawberry sauce. Police say that he topped himself.

'You know, somebody actually complimented me on my driving today. They left a little note on the windscreen. It said, 'Parking Fine.' So that was nice.'

FX Research by David Johnson

Daily Currency Analysis with Chris Verdet

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