Good morning,
Brexit is back
We expect this week to be another tough one for the pound with volume around Brexit increasing as Westminster starts to creak into action following its summer holidays and the data calendar is full of the kind of news that gets sterling watchers nervous.
Following a few weeks of respite, Brexit headlines are going to become all the more prevalent. Theresa May returns to Downing St this week following a walking holiday; the last time the PM returned from a walking holiday she called a general election so God knows what could be on the cards this week. More likely than a call for another vote, however, will be Cabinet meetings on Brexit and a continuation of messaging around strength within the Brexit negotiations.
This week and the next, ministers are expected to publish plans for Brexit from their respective departments on matters such as the customs union, fisheries, farming and the Irish border. If these plans are seen to be ‘pie-in-the-sky’, unrealistic to implement or warn of dangers to the UK economy then naturally we think that sterling will continue to trade poorly.
EUR not from round here
Sterling versus the euro is now the Brexit cross. It used to be GBPUSD, but the actions of the Trump administration and the ongoing situation with North Korea have made that pair a bit of a mess. The juxtaposition of a European economy with a secure political foundation – including the upcoming election in Germany – and an economic recovery that is becoming more embedded by the month with a British economy that is becoming stagnant and a central bank unlikely to raise interest rates anytime soon.
Morgan Stanley last week published a note on the pair and is predicting a fall to parity – GBPEUR at 1.0000 – by Q1 of next year. Certainly conditions for GBPEUR to fall further are in place as we have listed above. They are not the only people calling for parity by then (HSBC believe that the Rubicon will be reached by the end of this year) and we expect calls of this magnitude to increase as Q3 grinds on.
Another knife edge of the week
For now, the focus will be on this week’s data calendar which focuses heavily on the consumer; simultaneously the driver and the most under-fire constituent of the UK economy. We will start with inflation (tomorrow), unemployment and wages (Wednesday) and retail sales (Thursday) and these releases will either catapult sterling higher or further dampen spirits.
We do not believe that inflation has peaked in the UK quite yet and a run towards 3% is still possible by October. Similarly, we do not expect that we have seen the worst of the wage slowing quite yet and therefore the Consumer Pain Index (declining real pay) is set to extend.
Similarly retail sales are a volatile indicator but recent footfall and credit card spending numbers would suggest that Brits have not been hitting the shops as they have done in the past.
Have a great week.
Jeremy Cook, Chief Economist