Morning Brief – Wednesday 3rd

Good Friday? Good Monday!

Mild progress has been made in the Euro this morning, extending yesterday’s late afternoon and New York session gains that the European single currency had already made. Considerable losses that had pushed the Euro to a six-week low on a trade weighted basis were initially provoked by the Italian senior minister for the economy, a member of the Lega party, claiming that all of Italy’s problems would be solved by revoking membership of the single currency. However, bringing moderate calm to soaring bond yields and domestic pressures, Italian Prime Minister Conte confirmed that membership could not be renounced, allowing EURUSD to consolidate back above 1.1550. Sterling has performed admirably this morning amidst the culmination of the Conservative Party conference in Birmingham today. The Dollar remains bid following Fed Chair Jay Powell’s confirmation of a healthy underlying US economy that is deserving of continued monetary policy tightening. Overnight it was reported that the Italian government had agreed to constrain the spending plan to 2.0% (instead of 2.4%) of GDP, however, with only unverified reports to be found, the Euro found considerable resistance around 1.16.

Since Market Open:

• GBP:   May’s speech at the Conservative Party Conference leaves sterling well supported. UK politics will remain a primary focus for markets, however, at least for today, sentiment is overwhelmingly positive.

• EUR:   2.0%, 2.4% 1,9%?! The coalition between the Five Star Movement and the Italy’s Lega Party would be well advised to make up their mind on a fiscal spending plan before the Commission steps in.

• USD:   Powell reminds markets that the US is the place to be at the moment, however, a resurgent Euro does little to support the greenback, with the Dollar losing ground on an intraday basis.

• EM:    With an indecisive Dollar today, domestic emerging market risks remains largely balanced with the index little changed.

Pound Sterling:

Theresa May: Less Coughing, More Coughing up!

The Conservative Party Conference concludes today and, with great risk of jinxing the Pound’s survival at present, it has been relatively plain sailing. Former foreign secretary, Boris Johnson, continued to attack May’s Chequers plan from which his resignation stemmed. In retaliation, the Prime Minister even branded his comments at the conference as a good performance, signalling toward the underlying insincerity that the public and party members alike often attribute to the former cabinet minister. May’s speech today signalled towards the end of austerity, a confusing and shrouded economic and fiscal policy that consisted of little more than clever branding. Despite the insignificance of the manifesto pledge, May today promised that the people’s “hard work has paid off” and offered a promise of better times ahead. May similarly called for a party unity, addressing the deep divide that exists within her party. Markets rewarded Sterling with additional value, with the Pound rising by nearly one quarter of one percent on a trade weighted basis. Traders and investors rewarded the Pound primarily because May’s speech promised a greater sustainability within the incumbent Conservative Party leadership, promising a more generous fiscal backdrop that should promote upward price pressure and a more active economy.

The Euro:

I’m Caught in a Trap:

The UK and the EU certainly can’t walk out, but one thing differs from Presley’s masterpiece: it’s certainly not because the two love each other too much… baby. The two dominant pressures within markets this week are Italian and British political risks: certainly, making the GBPEUR cross a tricky one to navigate! The Pound and Euro both carry an immense discount due to the uncertainty surrounding their constituent politics. The value of one pound to the Euro rose to as high as 1.1266 following today’s conference speech, however, remains range bound between last year’s lows and parity drive that topped out around 1.07 and, on the top side, the relatively astronomic highs of 1.16 only a few months ago. Whichever way the trend breaks, it will be associated with high volatility and perhaps break the deadlock we have seen post-Brexit.

Discussion and Analysis by Charles Porter

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