The Oxford dictionary’s primary definition of the word war is “A state of armed conflict between different countries.” Over the past couple of months however the word has taken a more diplomatic meaning, with the phrase ‘Trade War’ becoming more prevalent as nations scuffle over old trade ties. Whether it be Brexit, NAFTA, US/China, the end goal of these talks is apparently the same, to regain control. These war of words has seen financial markets fluctuate wildly, with movements in major crosses of 1 percent in a 24hr period almost a weekly occurrence. Fundamentals are playing second fiddle to political releases. On Tuesday we saw UK wage growth soar to 2.6 percent and BoE Governor Mark Carney extend his tenure to 2020, yet sterling gained just 0.05 percent against the dollar. In such an environment we strongly recommend our client’s hedge their currency exposure and speak to their dealer to discuss the options that are available to them.
Back to matters at hand, starting with the UK, where May’s allies have reportedly admitted her biggest challenge is not securing a Brexit agreement but rather fending off the increasingly hostile Eurosceptic faction in her own party. Rumours of an upheaval in the Tory party are ripe. Unconfirmed reports that the influential ‘1922 Committee’ of the ruling Conservative Party has received 35 letters of no confidence in the Prime Minister. Jacob Rees-Mogg supposedly has the support of 60-70 pro-Brexit Conservatives. If true this would be very worrying for May as to trigger a vote of no-confidence would require just 48 Tory MPs.
EU leaders have come to May’s support in a timely manner, delivering encouraging comments regarding a borderless Ireland and Junker’s latest speech where he spoke about the prospect of developing an ambitious new partnership with the UK. This has seen markets appetite for sterling grow with GBPUSD settled above 1.30, while GBPEUR remains above 1.12.
In the majors, and the dollar remains king. Last Friday’s Non Farm’s figure coupled with a better than expected average hourly earnings figure saw the probability of a further 2 hikes this year go from 61 percent before the employment release to 82 percent today. Trade talks with China and Canada are also continuing this week with the US seemingly keen to get an agreement sorted with both parties.