Sterling Celebrating Brexit Day
The pound has been performing rather bravely in the face of today’s unprecedented historical event. It had slipped after Prime Minister May signed Article 50 yesterday, but it’s now rising after optimistic remarks by Chancellor Philip Hammond. Market volatility can be expected in the month ahead as we discover whether we’re in for a ‘hard’ or ‘soft’ Brexit.
The US dollar roared back up like a rollercoaster on upbeat speeches made by members of the Federal Reserve as well as surprisingly good data. Consumers are still counting on President Trump to make them richer as evidenced by March’s consumer confidence figures which soared to a 16-year high.
Pound Sterling – UK Markets
So far, the pound has managed to defy predictions that it would drop by 10% today. It started low against all major peers, except the South African rand which is, like, Sterling, at the mercy of political pressure. Yesterday’s Brexit-related political news concluded with Scotland’s parliamentary decision to call for a second referendum vote. The risk of Scoxit and the Prime Minister’s signing Article 50 last night started Sterling on a downhill run that’s since reversed. At this decisive moment, politics are more influential on the pound than any of today’s data. The UK has had a certain ambivalence since joining the ‘Continental Club’, in January of 1973 and it is now scheduled to exit by late March 2019.
There’s a great deal of volatility for Sterling expected through today and in the next month as the non-negotiable points are made clear. This begins within 48 hours in European President Donald Tusk’s response which will weigh heavy on the pound if it appears that EU’s stance will be tough. These guidelines will likely be approved on 29 April with technical negotiations over a period of 22 months.
Data releases this morning show that Consumer Credit rose above expectations for February, suggesting shoppers are relying more on borrowing as prices rise. There’s the more important GDP data coming out this Friday, which could be another risk event for the pound. In an early interview for The Today programme, Chancellor Philip Hammond expressed his excitement about Brexit, as opposed to being nervous. He thinks that walking away from the negotiations without a deal wouldn’t be good for Europe and also said he disagrees with the ‘divorce bill’ figures Brussels has calculated.
US Dollar – US Markets
The US dollar has stopped losing ground after a series of US Federal Reserve (Fed)speakers indicated the likelihood of as many as three interest rate hikes this year. Yesterday 4 Fed speakers did nothing to dismiss this expectation, which was a positive distraction from the US Dealmaker in-Chief who’s struggling to adapt to his new role. President Trump is scrapping his predecessor’s environmental protection policies, removing restrictions that limited CO2 emissions which have been seen as the main driver of climate change. His appointed head of the Environmental Protection Agency, Scott Pruitt is a climate sceptic and Trump defends the move, saying it will create many industrial jobs. Environmental groups are promising to fight the measures in court, and these lengthy lawsuits will benefit the fossil fuel lobby who will be free to act with impunity until the cases are settled.
Yesterday’s US Consumer Confidence release shattered expectations with a March reading that’s at the highest level since December of 2000. With Trump’s promised economic stimulus, more Americans have better expectations for their future personal incomes, jobs prospects and businesses. More good news came in from February’s Richmond Fed Manufacturing Index which showed factory output increasing. Today’s 2 speeches by Federal Reserve members might send the dollar higher if they suggest a readiness for an additional rate hike this year.
Euro – European Markets
The euro is weak against the pound today and losing ground to the US dollar as both are firming after recent losses. The single market currency isn’t moving in reaction to any data release, but rather, to the political events and news occurring today. The London Stock Exchange Group was right when it warned last month that the European Commission wouldn’t approve London Stock Exchange (LSE) merging with Germany’s stock exchange Deutsche Boerse. Today EU regulators blocked the £21 billion deal between Europe’s 2 largest stock exchange operators, on the grounds that it would have set up a ‘de facto monopoly’ for some financial services. The commissioner said the LSE was at fault for not selling its Italian bond trading sector, which was why the merger would have created an unfair dominance in the financial market. The EC denied that Brexit influenced their decision, saying it had made their judgement based on the UK’s current position inside the EU. They added the example of having approved a merger between 2 US companies operating in Europe on Monday, saying they would ‘deal with any company who has a footprint in the European market’. Their decision is based on a desire to encourage competition in the European market regardless of where the company originates.
Europeans living in the UK will be relieved to find out that the government now appears willing to compromise over the rights of EU citizens. It has previously been expected that triggering Article 50 today drew a line after which those arriving, tomorrow, for instance wouldn’t have full EU rights. It’s now agreed with the European Parliament that full rights will continue until the process concludes.
Other Currencies – Highlights
The South African rand tumbled on speculation that the country’s finance minister, Pravin Gordhan was summoned back to South Africa from the UK because President Jacob Zuma intends to sack him, again. The rand has reacted nervously to the disagreements the president and his minister have had over the Russian plan to build nuclear power plants. It’s also fluctuated over a rift about how the president would rather manage state-owned companies for his own political gain. A report by a Canadian business research centre said Zuma’s ‘Machiavellian tendencies’ were the cause of the country’s economic crisis, specifically noting his previous removal of Gordhan who had served as Finance Minister from May 2009 until May 2014. He was replaced by a novice minister who was, in turn, immediately replaced, so that, in the span of a week, there were 3 different finance ministers. 18 months later, after the rand had plummeted, Gordhan was back in his position.
Finance Minister Gordhan had only just arrived in the UK for a week-long roadshow to market South Africa to UK and US investors when he was called back by the notoriously erratic president. His delegation had only just begun meeting with 50 investors described as having ‘great faith’ in the South African economy. The finance minister has worked to protect South Africa from being issued a junk credit rating by the 3 largest credit-rating firms. The agencies have warned that continued political infighting will cause a further downgrade. The firing may be postponed until after this week’s funeral of anti-Apartheid activist Ahmed Kathrada who had spent decades in prison with Nelson Mandela. President Zuma has been found guilty of using taxpayers money to decorate his home which doesn’t go down well in a country where employment is at 27%,and 6 million people are jobless.