Euro down on its luck
The euro suffered losses across the board last week, despite doing nothing particularly wrong: most of the economic data from Germany and pan-Euroland beat forecast. It was just that investors’ attention was elsewhere. It was on the United States, where it continues to look likely that interest rates will go up in December. And it was on Britain, where the referendum result continues to cripple sterling.
Brexit means ‘Hard Brexit’
The only ray of sunshine in the pound’s week was a suggestion that parliament would get a vote on the Brexit terms. That idea was quickly squashed when Brexit Minister, David Davis told parliament yes, they would get a say, but not a vote.
It was game on again for the sterling bears as the Brexit minister gave the impression that the government is still intent on pursuing what has become known as the “Hard Brexit”; an abrogation of all things EU, including the single market and free access for financial institutions. Their hand was strengthened by a story that the pound’s post-referendum decline is pushing up prices not only for imported goods but also for domestically-produced Marmite.
A rate hike for Christmas
The US dollar was helped on its way by the minutes of last month’s Federal Open Market Committee meeting, which appeared to leave a December rate increase on the table.
Although only three of the FOMC’s ten members voted to increase interest rates in September, more of them felt they should not wait too long to pull the trigger. “Several members judged that it would be appropriate to increase the target range for the federal funds rate relatively soon…” The semanticists can argue about the exact meanings of “several” and “relatively soon” but investors reckon they mean “more than five” and “before Christmas”.
In the Item Club survey released on Sunday, focus was mainly on growth prospects for next year. The fall in Sterling is expected to give a strong boost to exporters but become a depressant for investment and consumer spending. We have been here before notably in the seventies when the J curve theory failed to work and in the early nineties when it most certainly did. The Item club forecasted Growth of 0.8% for 2017 (almost all export) and a small bounce in 2018 to 1.4%. More interestingly they forecast inflation to be at 2.6% by the end of next year.
Who’s been eating my porridge?
It would appear that a small rally for Sterling has commenced this morning; however there have been several false dawns of late. Maybe this time with the market very extended the Bears might run for cover and some cooler porridge!
In an interview yesterday afternoon Stanley Fischer averred that the US economy was neither too hot nor too cold, in fact it is just about right! Core inflation is running at 1.7% versus the target of 2% and employment is just about full. Strangely the participation rate is beginning to move up from a relatively low base of 65% so no more improvement in the headline figure is expected.
Very strange that the US and UK produce similar headline unemployment numbers circa 5% and yet participation in the US is about 65% whereas the figure for the UK is nearer 75%. The main take from the Fischer interview was that December is almost a done deal, but that the next rise in interest rates may not come until December 2017 if at all.
Euro project in doubt
When Otmar Issing, one of the senior founding architects of the Euro, warns that it is in trouble one should pay attention. His best hope for the Euro was that it would continue to muddle through struggling from crisis to crisis. His most serious and perhaps concerning remark was that the ECB has fatally compromised the system by bailing out bankrupt states in palpable violation of the Treaties.
He was further reported as saying that the Stability and Growth Pact had more or less failed, with discipline done away with by ECB interventions that have taken away fiscal control mechanisms from markets and politics. Harsh words indeed and nobody likes the truth!
Sarah, Senior Account Manager at Moneycorp
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