Trouble Brewing at No. 10 Again – 13th November 2017

Trouble Brewing at No. 10 Again – 13th November 2017

Just about the only plank of support Sterling was receiving was unceremoniously removed over the weekend as another rebellions brewed to challenge emerged to the leadership of Prime Minister Theresa May with Boris Johnson and Michael Gove restating their Hard Brexit credentials. They also openly criticized Chancellor Philip Hammond for being unprepared for a “no deal” scenario. If this wasn’t enough for the beleaguered PM, the backbench rebellion from MP’s who want Mrs May to face a leadership challenge has now reached forty, just eight short of the number required to force a vote.

The infighting resulted in Sterling starting the week lower in Asian trade, reaching lows of £/$ 1.3060 and £/€ 1.1222 versus the US Dollar and Euro respectively. This was quite a fall having closed on Friday at £/$ 1.3230 and £/€ 1.1313.

Johnson and Gove’s comments this weekend came after the conclusion last week of the fifth round of Brexit talks when EU negotiator Michel Barnier commented that he is preparing for the “total collapse of negotiations” as the UK is not prepared to provide the necessary proposals on the three main points of contention that the EU demanded at the start of the talks. The words of Theresa May when she promised that the EU had nothing to fear over the Budget and the UK would pay “every cent” it is legally due to pay, sound hollow now as David Davis continues to prevaricate at every turn bringing anger and frustration. There has been no discernible progress in talks which leave British businesses even further (if that were possible) in the dark over what they can expect once the UK leaves the EU.

It seems therefore that the EU is going to have to “come up with” its own offer on how much it expects before the two sides can really negotiate and move forward.

This week is an important one for UK data with inflation, retail sales and employment data all due for release. The degree of expectation generated for this week’s data has been a little deflated following the MPC meeting at the start of the month where BoE Governor Carney basically gave advance guidance that inflation would exceed 3%, the gap between prices and wages would widen, unemployment would remain at record lows and the consumer was in danger of withdrawing support for the economy.

Traders have already positioned themselves for these outcomes and it would be a major surprise if Carney’s predictions were anything other than accurate. It is hard to see where there could be any surprise, other than the possibility that retail sales could be even weaker, given that retailers have already started to discount prices to ward off concerns that some shops have already seen a 5% fall in sales from the same period in 2016.

Inflation is a concern in both the US and Eurozone too. In the US, it is the lack of inflation that is causing concern to the FOMC which is keen to embark on a normalization of monetary policy. In the Eurozone, the ECB has signalled that unless region wide inflation starts to increase dramatically it is set to leave rates unchanged for the foreseeable future.




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