Good morning,

GBP: Conservative concessions

Politics and economics combined to send sterling all around the houses yesterday, although GBPEUR and GBPUSD are little changed from where we opened up yesterday.

The economics of the labour market was enough to send the pound lower. The juxtaposition of an increase in the employment rate to a record 75.6% and Tuesday’s news of lay-offs at both Poundworld and Jaguar Land Rover will be lost on nobody, and we think that that yesterday’s jobs report could soon be revealed as a high water mark for job creation. Wage growth stagnated in April as well and higher oil prices could be enough to eliminate real wage gains before they’ve had a chance to bed in. Today’s inflation numbers are due at 09.30 and will be the effect of oil markets on petrol station forecourts that will be the most closely viewed.

Theresa May’s Brexit concessions lifted sterling, however, as Pro-EU Conservative MPs forced the government into backing an amendment that, to all intents and purposes, eliminates the chances of the UK leaving the EU without a deal. The amendment would give ministers until the end of November of this year to reach an agreement with the EU on the final Brexit deal. If no deal is forthcoming then MPs will have to vote on plans to break the logjam. If there was still no deal by February 15 2019 — 6 weeks before the end of the Article 50 period — then the government would have to “follow any direction” from MPs.

The rest of the amendments will likely be defeated today without nearly as much drama and Brexit focus will shift to the end of the month’s EU summit and next month’s votes on Customs and Trade bills.

USD: Higher rates and hang the consequences

Today is Fed day and we will likely find out just how little the US central bank cares about emerging markets. That may be a bit unfair, but certainly the movements in currencies such as Brazilian real, South African rand and Turkish lira will not be an impediment to a 25bps increase in US borrowing costs.

We expect that the Fed will increase interest rates by 0.25% and that the ‘dot plot’ chart of future rate expectations will show only one more hike this year.

Yesterday’s inflation release was enough to keep expectations on the straight and narrow and the dollar has been rewarded with some strength through the Asian session. How much it can continue will depend on Governor Powell’s policy statement tonight.

EUR: All set for a positive meeting at the ECB tomorrow

Tomorrow’s European Central Bank meeting is the most important event this week for the single currency with, we think, the euro set to strengthen as the ECB begins to portray itself as a central bank that is happy to be seen as willing to explore options around a tapering of its quantitative easing plan. We would hope to see some concrete proposals by September.

Heartening news from the Italian political environment continues with Italy’s new Minister for European Affairs Savona saying that the euro has an indispensable role, as “if you want a single market you must have a single currency. If you allow currencies to move, to fluctuate inside the single market, you are breaking the unity of the market”.

Have a great day.

Jeremy Thomson-Cook, Chief Economist