Brexit Uncertainties Weigh Down the Pound
The Pound was momentarily lifted against the Euro after the release of July’s UK government borrowing figures, before slipping again. JP Morgan strategists have downgraded their Sterling to Euro forecast by 3-4.5%, noting they don’t expect enough positive economic data or upbeat Brexit sentiment to boost the Pound.
EU responses to this week’s release of formal Brexit papers indicate the return to formal negotiations next week will not proceed as quickly as the UK wishes.
The Euro is slipping against the US Dollar due to expectations that the European Central Bank (ECB) will put forward a cautious monetary policy message at the Jackson Hole conference this week. The Euro lost some momentum last week when the ECB minutes revealed concerns about the Euro rising too high in the future.
Pound Sterling – UK Markets
The Pound has lost 0.44% to the US Dollar, trading at $1.28. The Sterling to Euro rate was briefly improved by 0.1%, with the exchange rate remaining at €1.09.
The Pound rose slightly against the Euro, but not the US Dollar, when the UK public sector finance figures unexpectedly showed a surplus of £0.184 billion, rather than the government borrowing around £1 billion, as had been anticipated.
The two formal Brexit papers released yesterday explain the government’s position regarding data protection and goods and services. The UK wants to ensure that UK and EU goods, which are put onto the market before Brexit begins, can continue being sold. The UK’s concept of the “freest and most frictionless trade possible” includes the proposal that products which were approved for sale prior to Brexit would continue being sold without further compliance checks.
Theresa May is pressing the EU to begin trade talks as early as October, with her spokeswoman Alison Donnelly saying that “both sides need to demonstrate a dynamic and flexible approach.” In an indication that the EU won’t be rushed, Slovenian Prime Minister Miro Cerar told the Guardian that “the process will definitely take more time than we expected at the start of the negotiations.” Cerar called the issue of paying a Brexit bill “tricky.” Michel Barnier, the EU’s chief negotiator, emphasised that next week it will be: “Essential to make progress on citizens right, settling accounts and Ireland.”
US Dollar – US Markets
The US Dollar has strengthened in anticipation that this week’s Jackson Hole conference will offer insight into the US Federal Reserve’s monetary policy plans. The US Dollar Index (DXY), which measures the value of the US currency against six major currencies, rose by 0.36%, to 93.41. The euro dropped by 0.37% to the Dollar, trading lower at $1.17.
The Dollar could be weakened if tensions between the US and North Korea flare up again over the defensive military exercises that South Korea and the US are conducting in the region. The ten-day Ulchi Freedom Guardian military exercises routinely draw harsh rhetoric from Pyongyang, and, yesterday, North Korea warned that they could lead to an “uncontrollable phase of nuclear war.” North Korea renewed threats against Guam, saying that Hawaii and the US mainland were unable to “dodge the merciless strike.”
The Dollar could be knocked down a little when the Richmond Federal Manufacturing Index is released later today since it is expected to fall from a reading of 14 in July to 9 in August. The survey of manufacturing executives indicates their optimism towards the next six months of economic conditions and it measures new orders, employment and prices paid and received for goods.
Euro – European Markets
Sterling briefly regained a little ground against the Euro today, exchanging at £1.09. The Euro dropped against the US Dollar by 0.37%, with the rate at $1.17.
The Euro wasn’t boosted by German ZEW Institute economic sentiment showing expectations have fallen to a nine-month low. The average figure is 23.8 points; July’s reading had been a low of 17.5 and August was expected to come in at 15, but the “strong decrease in expectations” knocked the figure to 10. The Institute noted the “widening scandal in the German automobile sector” as a contributing factor to the nervousness about German growth.
The German Finance Ministry reports that the “so-called diesel crisis should be classified as a new risk to the German economy”, after Volkswagen was found guilty of cheating on US diesel emissions tests in April. Germany’s Chancellor, Angela Merkel has said that it isn’t fair that executives in the automotive industry reward themselves with big bonuses. She said that it isn’t the governments place to limit executives’ pay and bonuses, but the industry should take “a more sensitive approach” because “Trust has been lost and it is going to be very hard to win it back.”
Angela Merkel’s campaign for re-election as Chancellor was given a boost by The Bundesbank’s statement that the German economy could grow by more than had been expected. Germany’s central bank had previously anticipated a 1.9% rate of growth for 2017, but after the first two quarters of growth surpassed expectation, they believe that momentum will continue to drive Germany’s GDP higher.
Other Currencies – Highlights
The Australian Dollar gained a slight 0.7% against the Pound, trading today at 1.62 AUD. The Aussie lost 0.24% of value against the US Dollar, trading at 0.79 AUD.
Australian banks are not keeping up with new international industry standards that prevent money laundering, according to experts commenting on Commonwealth Bank of Australia’s (CBA) money laundering probe. Regulators and banks have increased their focus on increasing compliance measures after HSBC Group and Standard Chartered were heavily fined in 2012. According to Philippa Allen, CEO of ComplianceAsia, taking compliance seriously “is not as widespread in Australia” because “Australian banks have not had the big fines imposed on them like their global peers have.” As HSBC increased spending on compliance by 12% over the last year, CBA decreased spending by 7% for the year ending in June, according to the bank’s annual report. CBA explained that this decrease was due to the “timing and completion of key risk and compliance projects” that had been carried out the year earlier.
The Pound has held firm against the New Zealand Dollar, trading at 1.76 NZD. The Kiwi to US Dollar exchange rate fell by 36% to 0.72 NZD and the Euro to New Zealand Dollar is trading at €1.60. Tomorrow, 23 August, is New Zealand’s most important day for economic data since information regarding July’s Trade Balance, Imports and Exports will be released. June’s exports increased by 10.7% compared to the previous June which marked the fastest rate of expansion since July of 2015. Exports valued at 4,697 million NZD, included milk powder, butter and cheese which rapidly increased by 44.9% year-on-year. China is the fastest growing market for New Zealand exports, growing by 25.6% in June compared to an increase of 41.8 in May.