Sterling lacking direction; absence of Brexit drivers provides support
In a classic case of 'no news is good news', the pound drifted a little higher against both the dollar and euro yesterday.
Traders are still prepared to accept that Brexit talks that will move to stage two in the next couple of months are being prepared for diligently and with a measure of planning that was absent from the first round. This 'Emperor’s New Clothes' approach requires an enormous leap of faith, yet there are number of analysts prepared to take it as read.
A poll conducted by Reuters predicts that sterling will remain steady versus both the dollar and euro and the risks of a major fall are minimal. I must be an outlier from that view as I see the risk of a collapse in the pound, particularly versus the common currency as, while not probable, likely.
The dollar could struggle this year although the Fed is still predicting 'several' rate hikes. I would say the risk for the pound is to reach 1.05, or if things go really badly: parity versus the euro, while against the dollar 1.2800 or possibly 1.3000 could be the base.
Today’s data to provide clues
Eurozone inflation data is released this morning and although it is unlikely to be as strong as in Germany across the whole region it is likely to remain at around 1.5%. Analysts are predicting a marginal fall to 1.4% but the risk is to the upside. There have been comments from ECB Council Members this week about the withdrawal of additional stimulus but until Mario Draghi is convinced that the region’s economy is able to perform unaided little is likely to change. As with the US, it will be the anticipation of change rather than change itself that will be the catalyst for a stronger euro.
In the US, it is the monthly jamboree that is the employment report. While analysts have taken to using the six-month rolling average as their prediction for the headline number, traders prefer to gamble. There is general anticipation that the headline will be at or around +200k but at some point, with the unemployment rate (apparently) at 4.1% job growth is likely to start to slow.
It will be a highly unusual event if the employment market starts to reverse from these levels despite there having been no rise in inflation that is generally associated with a tight labour market.
Brexit referendum argument to continue
I wrote a fairly innocent two-line comment on social media yesterday in which I said that “God forgive me I find myself agreeing with Tony Blair”. The subject of this aberration was the fact that Blair believes that the people of the UK should be given the chance to vote on the deal that is agreed between London and Brussels over Brexit.
This is, to me, a perfectly reasonable idea given that Brexit has morphed into something quite different from what most Brexiteers voted for. I do not, for a moment, believe that the whole in or out vote should be replayed. Indeed, what is sauce for the Scottish independence goose is sauce for the Brexit gander.
All my readers who find themselves to be true believers in democracy started to defend the UK population who were being insulted and slandered over their ability to understand what they were voting for. They were countered by all those who believe that a simple majority is not enough unless the entire population votes.
Of course, the simple fact is you are either a Remainer or a Brexiteer as a basic position but surely everyone must appreciate the folly of having a Brexit managed by a basically remain government.