What’s been happening?

Pound Sterling – UK Markets 

The Pound is in recovery mode following a turbulent 24 hours in British politics, during which we saw resignations of two major Brexit figures; the Secretary of State for Exiting the European Union David Davis and Foreign Secretary Boris Johnson. The Pound dipped as the resignations suggested to foreign exchange markets that the tenure of May as Prime Minister is now vulnerable, which in turn significantly increased the odds of a hard-Brexit; an idea currency markets would not be happy with. However, some relief was offered for Sterling as quitting Brexit Secretary Davis stated upon his leave that he would not mount a leadership challenge against PM May. 

The lack of confidence in the House of Commons required to execute a confidence vote against May simply does not appear to be in place at the moment, which hints that markets may have overreacted. Both Davis and Johnson have also been replaced by apparently competent figures, meaning that May’s government may not be in as much crisis as media had initially reported. The Pound to Euro exchange rate was quoted at 1.1272 early this morning, but since has increased to 1.1312, supporting the ‘overreaction’ idea. Although, Sterling’s gains will continue to be challenged by political factors until May’s Brexit plan gains more support from her cabinet.   

US Dollar – US Markets

There were no major US data releases, however, US consumer debt came in higher than expected in May, at a seasonally adjusted rate of 7.6% after 3.2% in April, Federal Reserve figures showed yesterday. Debt rose in May by the most in six months with more credit-card debt outstanding and non-revolving loans. Consumers were seen spending more freely midway through the second quarter. After slowing in March to recover from a debt-laden fourth quarter, households were recorded to be picking up the pace of credit in following months. CFTC data recorded an increase in long dollar positions to 13-month highs. 

Euro – European Markets

The Eurozone Sentix investor confidence picked up to 12.1 this month from 9.3 previously and was above the consensus expectation of 9.0. This was a much-needed bounce in investor sentiment for July, with the Italian political situation finally cooling down. 

European Central Bank Council member Nowotny stated yesterday that inflation was moving in the right direction and recent lower growth rates do not mean an end to the good times, but rather that the Eurozone has reached a plateau and can grow with capacity growth. He also commented that a global trade war would have the potential to become a currency war, leading to additional negative consequences, however, at the moment, the situation is less dramatic than at first sight. 

ECB President Mario Draghi said yesterday that new trade barriers are the main risk to Europe’s economy, adding that “the risks now mainly relate to the threat of increased protectionism." He also stated that the bank had decided to phase out its 2.4 trillion Euro three year stimulus program at the end of this year because inflation is finally trending in with ECB’s target of just under 2%. Draghi’s rhetoric was in line with the ECB policy meeting, however, the Euro traded at mediocre 0.8845 against the Pound and 1.1721 against the Dollar this morning. 

What’s coming up? 

UK: UK Markets will be waiting for a reaction from the EU’s chief negotiator Michel Barnier in response to PM May’s new Brexit proposal. Beyond that, however, it is a relatively quiet week for the Pound, with Bank of England Governor Mark Carney’s speech tomorrow being in markets’ focus. 

US: Markets will be looking to the jobless claims reading, and consumer price index data released Thursday.  

EU: Euro markets will be looking to the minutes from the European Central Bank meeting out on Thursday. ECB President Mario Draghi will be speaking tomorrow morning.