01/09/2017 - Brexit Concerns Overshadow Hawkish BoE Tone

GBP

Sterling edged down on Thursday as concerns over the direction of Brexit negotiations weighed on the British currency, with investors ignoring supportive comments from a senior central bank policymaker that interest rates need to rise soon.

The Bank of England should not keep interest rates at their record low of 0.25 percent as an insurance policy against the risk of a “bumpy Brexit” and it needs to start raising borrowing costs now, BoE policymaker Michael Saunders said in a speech.

Investors also had their eye on the third round of Brexit negotiations which started on Monday, with the European Union’s chief negotiator saying he was concerned at the slow progress of the talks.

The British government has laid out a series of position papers that have outlined compromises over some of the issues likely to block progress in talks this year, but EU officials say Britain needs to settle its divorce bill with the bloc before a trade agreement can be discussed.

Brexit talks ended in stalemate, with both sides deadlocked over the divorce bill and tensions spilling over as the European Union’s negotiator mocked Prime Minister Theresa May. Michel Barnier said Britain is refusing to acknowledge its financial obligations and wants a deal that’s impossible to achieve. In the coded language of the EU, the “sufficient progress” needed to move on to trade talks has not been made.

EUR

The euro slipped against the dollar on Thursday following rumours that a growing number of European Central Bank policymakers were concerned by the strength of the euro and may go slower tightening monetary policy as a result. Formal talks over the future of the bank’s stimulus scheme were only beginning, meaning the ECB is highly unlikely to take any decision to start reining it in at a meeting next Thursday.

French President Emmanuel Macron’s push for an ambitious overhaul of Europe’s single currency bloc is running up against robust resistance in Berlin despite conciliatory public signals from German Chancellor Angela Merkel. During his campaign for the Elysee, Macron called for a big leap forward in European cooperation towards a so-called fiscal union. He is pushing for the creation of a euro zone finance minister and parliament, as well as a stand-alone budget for the currency bloc to cushion economic shocks in individual member states and head off future crises.

Nearly four months into Macron’s presidency, senior German officials say they are still waiting for ideas from Paris that might bridge the gap between France’s push for more euro zone burden-sharing and Germany’s insistence that member states take primary responsibility for their own economic problems. Although the true test for a Franco-German “grand bargain” on deeper euro zone integration will come after the German election on Sept. 24, early exchanges between technocrats in the two capitals have yielded little to no progress, according to people involved.

Key Announcements

09.30 – GBP – Manufacturing PMI; Forecast at 55.0 against previous of 55.1

13.30 – USD – Average Hourly Earnings MoM; Forecast at 0.2% against previous of 0.3% 

13.30 – USD - Non-Farm Employment Change; Forecast at 180K against previous of 209K

13.30 – USD – Unemployment Rate; Forecast the same as previous at 4.3%

15.30 – USD – ISM Manufacturing PMI; Forecast at 56.5 against previous of 56.3