Morning Brief – Thursday 22nd

Brussels Sprouts Little

Sure, Johnson met Merkel in Berlin yesterday but you try and make a pun suggesting political frustration and Germany’s capital city! Suggestions welcome! Now, in the real world this week, Sterling has been pushed higher (Monday), dragged lower (Tuesday and Wednesday) on whims of reports of progress and then frustration on the European front. When Merkel initially hinted towards potential progress despite Johnson’s hardline Brexit stance the Pound picked up 0.5%. But as it became clear that face to face meetings would still result in nothing this week the Pound slid once again, giving back the majority of its Monday gains to its peers.

France’s President Macron has suggested that his base case for Brexit in now a no-deal. That’s not really surprising: Since becoming a member of the European Council Emmanuel Macron, a staunchly pro-integration French politician, has pushed towards unity in Europe. So any state, individual or movement attempting to undermine his efforts for integration is always met with contempt. As Johnson meets Macron in Paris today, we’d be wise to remember the Frenchman’s Europhilic persuasion.

Other member states have remained on the sidelines when commenting on the UK’s new Prime Minister and recent Brexit developments. I suppose that’s unsurprising in Italy, where President Sergio Mattarella attempts to pick up the pieces of his country’s broke coalition. As his efforts continue to try and piece together a governing body capable of respecting the EU’s budgetary requirements, you won’t have seen this many pieces inserted in the wrong places since that infamous episode of the inbetweeners. Italian risk has weighed on the Euro, compounding with German economic risk to produce an EURUSD just pips off of its August lows which, for the record, are equal to 18-month lows on this pair. Optimism has been found at market open this morning from French and German PMIs that show optimism in the German economy.

Those trying to navigate the Pound Sterling this week and next should remember that financial markets have a tendency to buy a rumour and then sell the news. What does that mean? Well, for example, consider last year when we were waiting for Dominic Raab, the then Brexit Secretary to potentially head to Brussels for an emergency meeting ahead of the Brexit deadline. Upon reports that he would go, the Pound rose aggressively. Upon confirmation that he was actually in the Jag, it jumped back down. Now today Boris will meet Macron but is also expected to meet Michel Barnier this week who, remember, is negotiating on the exact same mandate that the Council offered him when he met with his counterparts from Theresa May’s cabinet. He’s not the guy who can scrap the backstop or come up with many smart exit strategies for the UK so don’t expect much. But, this weekend, Boris will attend the G7 meeting in Biarritz, France. The people there will democratically represent about 54% of the EU population. This lot can decide what they want to allow the UK. Any headlines ahead of this event and whatever the rumour mill produces will determine the direction of the Pound and, with confirmation or denial, any gains made could be unwound so there’s a strong argument to be on your toes! 

Discussion and Analysis by Charles Porter

Click Here to Subscribe to the SGM-FX Newsletter