Contradicting Brexit Headlines Cap Pound Sterling's Gains
What’s been happening?
Pound Sterling – UK Markets
Citing sources familiar with the matter, Bloomberg reported that the British and German governments decided to drop vital Brexit demands to make it easier to reach an agreement. Although the initial market reaction to this development boosted the sterling, it failed to preserve its strength as a spokesman for the German government refuted this report by stating that they had full trust in the EU’s chief Brexit negotiator, Michel Barnier, and their position on Brexit hadn’t changed. Touching on Bloomberg’s report and the possibility of reaching a “vague” Brexit deal, “We have always set out that when parliament votes on this, it needs to be a meaningful vote based on proper information. There is no change in that position,” Prime Minister Theresa May’s spokesman told reporters.
The report released jointly by the Chartered Institute of Procurement & Supply and the IHS Markit on Wednesday revealed that the business activity in the service sector in the UK continued to expand at a robust pace with the Services PMI improving to 54.3 from 53.5 compared to analysts’ estimate of 53.9. Commenting on the report, ”Although the sector remained in positive territory, the dark clouds of political indecision are still having an effect and preventing more business activity. Service providers are likely to continue along this vein for the rest of the year until those clouds have cleared,” Duncan Brock, Group Director at the CIPS, said.
US Dollar – US Markets
According to the U.S. Census Bureau, the international trade deficit of the United States increased by $4.3 billion on a monthly basis to $50.1 billion in July to match the market consensus. Meanwhile, the monthly report published by the ISM New York showed that the Current Business Conditions Index rose to its highest level in a year at 76.5 from 75 in July. “The Six-Month Outlook rose to an 8 month high, coming in at 79.9 in August, up from 77.8 in July. The Outlook has been 76.0 or above for half of the months in 2018. The six-month outlook has been a reliable short-run guide for current business conditions over time,” the publication read.
On the other hand, St. Louis Fed President James Bullard argued that the flattening yield curve and the inflation expectations signalled that the monetary policy was already neutral and reiterated that the Fed should hold off on further rate hikes in the short-term. "U.S. monetary policymakers should put more weight than usual on financial market signals in the current macroeconomic environment," Bullard added. The US Dollar Index failed to build on its momentum and retreated toward the 95 level on Wednesday.
Euro – European Markets
The Eurostat announced that retail trade contracted by 0.2% in the euro area in July after expanding by 0.3% in June to meet the market consensus. The report also showed that on an annual basis, sales rose 1.1% in July. The IHS Markit’s Services PMI stayed unchanged at 54.4 in August, and the Composite PMI ticked up to 54.5 from the previous estimate of 54.4. Summarizing this week’s PMI figures, “The survey data for the third quarter so far suggest the single currency area is on course to at least match the 0.4% expansion of GDP seen in the second quarter, yet the downturn in optimism raises questions over whether this pace of growth can be sustained into the fourth quarter,” Chris Williamson, Chief Business Economist at IHS Markit, said.
Similarly, commenting on Germany’s PMI reports, Phil Smith, Principal Economist at IHS Markit stated: “The sustained recovery of the PMI Composite Output Index from May’s low has put it back into territory that is historically consistent with around 0.5% quarterly GDP growth. This signals the continuation of the steady rate of expansion seen since the second quarter of 2017, as is the latest view of the official data.”
What’s coming up?
UK: In the absence of significant macroeconomic data releases from the UK, markets will be focused on Brexit headlines. “Looking forward to meeting Dominic Raab again tomorrow, continuing our work on the Brexit Withdrawal Agreement & on finding common ground between EUCO March guidelines and Chequers w/ a view to creating a new, ambitious partnership,” the EU’s Barnier tweeted out on Wednesday.
US: The weekly initial jobless claims, the ADP private sector employment report, Q2 nonfarm productivity, and unit labour costs will be featured in the U.S. economic docket. The ISM and the IHS Markit will be publishing their non-manufacturing PMI reports as well.
EU: Factory orders from Germany is the only notable data from the euro area. Member of the ECB's Executive Board, Sabine Lautenschläger, is scheduled to deliver a speech on Wednesday.