US President Trump has been in Finland meeting Russian President Putin and hIs pro-Russia remarks have spooked Republicans and government officials. But they have done little to harm the Dollar which is up about 0.3% on the day, with currency support coming from Federal Reserve Chairperson Powell’s bullish testimony to the US Senate. Whether the Fed hikes rates once or twice more this year, it’s clear that the Fed is not done hiking rates with signs that US economy performed well in Q2 and first half of July.
Sterling has been less robust, shedding 0.4% back to early July levels. The risk that Theresa May’s government suffers a parliamentary defeat in a Brexit bill later today and disappointing wage data for May are clearly weighing on a currency which nevertheless remains range-bound. If the government thought that the Brexit White Paper which it finally published last week would unify a divided cabinet and parliament, it will have been severely disappointed. If anything this blueprint for life after 29th March 2019, when the UK will formerly cease to be an EU member, has accentuated the already deep divide between Remainers and Brexiteers. The EU has stayed reasonably quiet since then but undoubtedly its negotiators will want to have their say in coming weeks.
Markets are still hopeful that the Bank of England (BoE) will hike rates 25bp at its meeting on 2nd August but today’s labour market data fell short of rubber stamping such a hike. Employment rose further in May and the unemployment stood firm at 4.2% but real weekly earnings contracted 0.1% mom. Real wages have effectively flat-lined for the past two years and there is seemingly little the government, let alone the BoE can do about it for now. Even if the BoE hikes rates next month, Sterling’s reaction could be muted given that 20bp is already priced in and the far bigger and more important issue of Brexit is still a long way from being solved.
