Market News & Insights
25 July 2018

Pound A Happy Passenger With May In The Driving Seat

Theresa May has pushed her Brexit department to the side and finally taken control of a process that was getting ever closer to derailing. The UK PM has been getting it from all sides, a battle on three fronts internally within her own party and the Brexit department, her own government as a whole and of course that small little matter of the EU, whom the UK are actually meant to be negotiating with. Much of the focus thus far has been focused on infighting within the UK government and May has already survived several potential career ending challenges but she fights on and now has taken control herself. While we’ve seen white papers and the “chequers” proposal, word on the street is the EU are still less than impressed with what’s been put forward but that’s a battle May will have to face another day, and at least the EU will look to find some form of common ground.

To achieve this common ground May has relegated the newly appointed Brexit Secretary to the side lines, Dominic Raab had been in the position less than a month after replacing David Davis who quit after spending about 5 minutes in Brussels over the last two years – all in all markets reaction to May’s power grab has been positive. GBP rallied as May is expected to take a softer approach and her advisor Ollie Robbins will have greater authority to ensure a deal is done. This good news was worth a .6% rally for GBP and the pound is holding steady thus far this morning. GBPUSD still holding below 1.3200, the real line would be a close above 1.3250 which could open up some additional GBP upside downside support still very solid towards 1.3000

The EU’s Jean Claude Juncker heads to Washington today and will no doubt try to address the ongoing concerns around trade wars and tariffs. The backdrop of Trump calling the EU their greatest foe and threats of tariffs meant that this was always going to be a somewhat tense meeting, but Trump has thrown the cat amongst the pigeons this morning, already firing out a tweet almost challenging the EU the abolish all tariffs, barriers and subsidies. A case of watch this space I think. While that may have larger implications going forward its unlikely to create too much volatility for the euro today, the single currency will have half an eye on tomorrow’s ECB meeting. No change is expected tomorrow and considering in the last meeting Draghi laid out his forward guidance on QE and rate hikes, we’re unlikely to see a great shift, especially as he’s been quite vocal in highlighting caution and potential downside risks over the last couple of weeks. It will be interesting to hear what he has to say on potential trade wars, which will no doubt be topical given today’s meeting in Washington, and if the ECB see a larger downside risk as a result.

The ECB are unlikely to step in a rescue the euro tomorrow and for me I think euro upside is limited, even better than expected IFO sentiment data failed to lift the single currency this morning. EURUSD still maintains its larger downtrend and 1.1500 still attracts, interest rate differentials between euro and US would also suggest additional downside, with any rally limited to 1.1800. EURGBP Looks to have places a recent near term top at .8960, while .8875/80 area now provides some light support, an area that previously acted as resistance to the move in the way up. A break below their targets a drop back towards .8830 area.

There’s really not much to shout about on the rest of today’s calendar, so we’ll be looking towards headlines for some direction in broader markets and later today Juncker speaks on EU-US relations. Fun times.