Morning Brief – Where do we go now?

Where do we go now?

Sterling has weighed heavy into the start of this weak. Economic data has been revised down for the first quarter of 2020 to -2.2% from a figure of -2.0% previously estimated. The reason for the revision was a deterioration in the current account showing that ahead of the pandemic the UK imported a higher value of goods than previously thought versus what it exported. With a rapidly increasing budget deficit the data revision reinforced concerns over a ‘twin deficit’ problem in the UK economy, a situation that markets are particularly wary of.

Piling on top of this hard data were statistics on mortgage approvals. The reopening of the housing market in May led analysts to settle on a consensus forecasts of 25,000 mortgage approvals for May, up from 15,600 for April. The data did not show such a dramatic improvement and instead mortgages approved last month fell to a record low of 9,300. The data portrayed an image of an economy suffering from uncertainty with investment decisions potentially being put off. The data combined to undermine GBP sentiment pushing cable (GBPUSD) to one-month lows and GBPEUR to three-month lows against a strong Euro.

The latest round of Brexit talks got underway yesterday with the EU and the UK maintaining their language of commitment to making progress and securing a deal. However, the lack of specificity and detail provided a further reason for underwhelming GBP demand in the market. Behind the scenes there is a lot of optimism for how a deal could emerge. However, progress is still frustrated in high-level talks by the same old stumbling blocks. Johnson’s plea to the EU last month to get the ball rolling has encouraged comments of compromise on the level playing field and the role of the European Court in enforcing the deal. However, there is still no evidence of progress at the level of chief negotiators or their deputies.

Tomorrow, Germany takes over the six-month rotating presidency of the Council of the European Union. In the European Union decisions are primarily made between two bodies: the European Commission and the Council of the European Union. The former consists (probably) of the individuals that Farage & co. labelled as unelected bureaucrats during the referendum campaign. The Commission holds a monopoly on the right of proposal – it has the right to suggest law for the ratification and debate of the Council of the European Union and Parliament (don’t worry about the Parliament). The Council of the European Union in turn negotiates and adopts EU laws, coordinates EU policy, develops foreign and security policy, concludes intra-EU and external agreements, and adopts the EU fiscal framework. Consisting of the government ministers of each EU nation it is responsible for the lion’s share and meaty aspects of the bloc’s coordination.

With Germany at the helm, the focus for the next six months is going to be the European Recovery Fund and Brexit. The rotating presidency affords some discretion in the agenda for discussion and will also give Germany’s opinion, as if it didn’t have it already, comparable influence within the Council. Angela Merkel, as Chancellor of a nation that exports tens of billions of Pounds worth of goods and services to the UK each year, is amenable to a Brexit deal. The hope for UK negotiators is that the ministers within the Council will use this presidency to secure accord and subsequently ratification of a Brexit deal ahead of the 31st December deadline. Although the short term may look bleak for Sterling, the Pound isn’t out yet. The market’s severe net short positioning against the Pound could soon be unwound if evidence of Brexit progress is made paving the way for sharp and persistent gains.

Discussion and Analysis by Charles Porter

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