Brexit Negotiations Hurt the Pound
The Pound dropped against both the US Dollar and the Euro as a result of the uncertainty caused by the course of negotiations between the UK and the European Union (EU) and a series of robust data coming from the US economy. Media sources revealed that the British negotiating team has made clear that the UK finds the EU position on the size of the “divorce bill” unsatisfactory, suggesting that the EU tries to extract more money than it is legally entitled to.
Michael Saunders, a member of the Bank of England’s (BoE) Monetary Policy Committee, talked in favour of gradually raising interest rates. Saunders is considered one of the “hawks” of the MPC along with Ian McCafferty. In the US, Donald Trump urged Democrats to back up his tax reform plan, which will include cutting taxes and simplifying the tax code, but didn’t go into further details during a speech in Missouri.
Pound Sterling – UK Markets
Today, the Pound slumped against the US Dollar, with the exchange rate set just below the $1.29 mark. Sterling also dipped against the Euro, with the exchange rate set at €1.08. The British currency dropped further when a member of the BoE’s MPC delivered a speech in Cardiff saying that the UK needs a rise in interest rates.
Michael Saunders, who has voted in favour of a rate hike in the last two MPC meetings, predicted that inflation will hit 3% in the next months, well above the 2% target set by the BoE. “A modest rise in rates would help ensure a sustainable return of inflation to target over time,” said Saunders. Saunders, who is a member of the MPC since August 2016, said that gradually raising interest rates will give the opportunity to borrowers to adjust to the new economic conditions, since many of them have never faced a rate hike.
According to UK media sources, Brexit negotiations have been brought to a standstill because of the different approach regarding the size of the “divorce bill.” British negotiators said that Michel Barnier’s hands are tied by the mandate handed to him by the European Union state leaders. Issues such as whether British citizens will be able to keep their European Health Insurance Cards (EHIC) and the movement of British goods post-Brexit are also making the negotiations more difficult.
US Dollar – US Markets
The US Dollar edged up against the Euro with the exchange rate set at €0.84, gaining 0.05% in value. The US currency didn’t manage to climb higher despite positive news that the country’s GDP expanded more than expected in the second quarter of the year.
The publication of the US Commerce Department’s data showed that the GDP increased at a 3% annual rate, 0.3% more than expected by analysts. This is the quickest pace recorded in more than two years. Economists noted that there are signs that the momentum was sustained in the beginning of the third quarter. They also suggest that Hurricane Harvey’s impact on the national economy will be limited.
Donald Trump delivered his first tax reform speech in Missouri during which he reiterated his intention to slash the US corporate tax to 15%. “We must reduce the tax rate on businesses so they keep jobs in America, create jobs and compete for workers right here in America,” said the President. Trump omitted to thank Gary Cohn for his contribution to the tax plan, while he thanked more than a dozen other people at the end of his speech. Cohn is a top financial adviser and a candidate for the replacement of Janet Yellen as the Fed’s Chair.
Euro – European Markets
The Euro dropped against the US Dollar with the exchange rate set at $1.18. The single market currency wasn’t boosted by a series of positive data published by Eurostat.
Data showed that inflation in the Eurozone rose above expectations in August reaching 1.5%, on a year-to year basis, versus the consensus forecast for 1.4%. It should be noted that the ECB wants inflation to reach the target of 2%. Core inflation also rose to 1.3% in August, on a yearly basis, bettering analysts’ expectations for 1.2%. According to Eurostat, the unemployment rate in the Eurozone in July remained stable at 9.1%.
In Germany, retail sales in July disappointed market experts. On a year-to-year basis, German retail sales increased by 2.7% in the second month of the summer, much less than the anticipated 3.5% figure. On a monthly basis, retail sales declined by 1.2%, far worse than the 0.4% expected. Spanish retail sales in July also missed expectations coming in at a 1.1% rise, instead of a 2.4% reading that analysts were anticipating. In Italy, the unemployment rate hiked to 11.3% in July, versus 11.2% in June.
Other Currencies – Highlights
The Pound fell against the Australian Dollar, trading at 1.63 AUD. Treasurer Scott Morrison said to Bloomberg that the Australian economy is shaking off the restraints. Morrison believes that the economic growth will accelerate in the next months, although household disposable incomes have been flat. The Treasurer also said that the government wants to increase competition in the banking sector, with the comment coming right after the Australian Prudential Regulation Authority was asked to make it easier for new banks to get licenses.
Sterling jumped against the New Zealand Dollar, trading at 1.80 NZD. A survey by the Property Institute showed that elections tend to dampen the residential property market. Data indicated that in the twelve months between July 2016 and July 2017, sales volumes across New Zealand dropped by 55.4%, with the majority of the drop taking place since the election date was announced in February. Real estate agents suggest that buyers often take a wait-and-see approach, when it comes to an election period, because of the possible effect of different policies on tax.
The Pound gained a bit of ground against the Japanese Yen, trading at ¥142.5. According to data released by the Japanese Automobile Manufacturers Association (JAMA), vehicle production in July increased by 1.4%, on a yearly basis, much less than the 6.9% reading in June.