UK Immigration Plans Leaked
The Pound remained stable against the US Dollar, trading above the $1.30 mark, but got weakened against the Euro. A leaked Home Office document revealed details on how the British government is thinking to shape its immigration policy, after the UK exits the European Union. The document shows that Theresa May’s government will try to cap the influx of low-skilled EU workers and is willing to allow only high-skilled EU citizens to stay and work in the country for more than three years.
In the US, comments made by Fed board members showed that the US central bank is considering slowing down the pace of interest rate hikes due to low inflation. These comments were the reason for the US Dollar’s value drop. In Europe, attention has shifted to tomorrow’s European Central Bank (ECB) meeting. Investors and traders will be waiting to listen to Mario Draghi’s opinion about the timing of the upcoming tapering of the ECB’s asset buying programme.
Pound Sterling – UK Markets
Today, the Pound retained its value against the US Dollar, with the exchange rate set above the $1.30 mark. Sterling slumped against the Euro, with the exchange rate set at €1.09. Geopolitical risks and uncertainty deriving from the situation in Korea made the FTSE100 drop in its opening as dealers were feeling reluctant to resume buying.
A Home Office document leaked to The Guardian gave some clues on how Theresa May’s government is planning to shape its post-Brexit immigration policy. According to the document, the new immigration system will try to limit the number of low-paid EU migrants and puts in question the right of EU citizens who work in Britain to bring family members from the continent with them. The Home Office will demand from any person who wishes to stay in the UK to prove that s/he has a minimum level of income. Furthermore, it is suggested that, in the future, only high-skilled EU workers will have the right to stay in the country for more than three years.
A report by the IPPR’s Commission on Economic Justice argued that the British economy needs a major overhaul because the economic model fails to create more prosperity for the country’s population. Tom Kibasi, director of the IPPR think tank, commented that “we don’t have an economic model, we have an economic muddle. There is a growing consensus across businesses, trade unions and civil society that a radical new approach is required.” The Commission on Economic Justice proposes stronger trade unions, new regulation of digital monopoly companies and possible new wealth taxes.
US Dollar – US Markets
The US Dollar dipped against the Euro with the exchange rate set at €0.83. The situation in the North Korean peninsula and comments by Federal Open Market Committee (FOMC) members regarding the US inflation and possible rate hikes resulted in the US currency’s drop.
Federal Reserve Governor Lael Brainard said that the Fed may have to slow down the pace of interest rate hikes as the US inflation remains lower than the central bank’s target. Brainard delivered a speech in the Economic Club of New York and was quoted saying that “recent soft inflation may be due to depressed underlying inflation. In that case, it would be prudent to raise the federal funds rate more gradually.” Brainard stressed that the US economy is “on solid footing.”
Robert Kaplan, the Dallas Federal Reserve Bank President, joined the club of Fed’s policymakers who believe that caution is required when it comes to raising borrowing costs. Kaplan said that, given the low figure of US inflation, the Fed should be patient. The FOMC member also stressed that the Fed should start immediately reducing its $4.5tn bond-buying programme.
Euro – European Markets
The Euro strengthened against the US Dollar with the exchange rate set at $1.19. The single market currency advanced against its US counterpart thanks to a Dollar sell-off ignited by comments which showed that the Fed’s board is considering slowing down the pace of rate hikes.
The day started with bad news coming from the German economy. The Bundesbank released data regarding factory orders in July, which were unexpectedly disappointing. On a month-to-month basis, factory orders declined by 0.7%, instead of rising by 0.3% as market analysts were anticipating. Factory orders, on a yearly basis, increased by 5.0%, far less than the 5.8% forecast, and a tick lower than the 5.1% figure recorded in June. However, a report by IHS Markit spread optimism as it showed that German consumers spent much more money in their August shopping than in July. In Italy, July’s retail sales dropped by 0.2%, on a monthly basis, in line with expectations.
A series of reports by various bank institutions suggest that the ECB will soon have to decide about gradually reducing its asset purchase programme or to change its parameters. ING analysts suggest that the amount of assets, eligible for purchasing by the ECB, is getting smaller and smaller. “The scarcity of German bonds will be a key factor in determining how much longer the ECB can keep the QE going, unless it changes the way in which it operates,” said the ING report.
Other Currencies – Highlights
Sterling strengthened against the Australian Dollar, trading at 1.63 AUD. The Australian Bureau of Statistics (ABS) published the Australian GDP data for the second quarter of 2017. The country’s economy expanded by 0.8%, on a quarterly basis, falling a bit short of the 0.9% expected. In the first quarter, the Australian economy had expanded by 0.3%, mainly because tropical cyclone Debbie had disrupted the economic activity. Strong exports and increased public spending helped the GDP figure improve.
The Pound edged up against the New Zealand Dollar, trading at 1.80 NZD. A survey published by the ASB Bank showed that local businesses expect the Kiwi to rise against the US Dollar in 2018, but they are worried for the currency’s drop in value caused by the upcoming parliamentary elections. The survey said that eight out of ten businesses in New Zealand looks at some form of hedging to protect themselves from any sharp moves in the Kiwi.
Sterling continued to drop against the Japanese Yen, trading at ¥141.5. Hiroshi Watanabe, ex-Ministry of Finance Currency Chief said that the Japanese economy has recovered enough for the Bank of Japan (BOJ) to begin to cut back on its stimulus policy. Watanabe, who is now the president of the Institute for International Monetary Affairs, noted that the BOJ should start reducing its annual bond-purchase target later in 2017.