Sterling tumbles on back of Teresa May BREXIT comments...

Week Commencing Monday 3rd October 2016

 

UK: A hard Brexit now on the cards

UK Prime Minister Theresa May finally set out some blueprints for Brexit, saying the UK was prepared to go “truly global”.

Addressing the Conservative Party Conference in Birmingham for the first time since becoming Prime Minister, and was highly anticipated by markets as a leading indicator of how the UK government will approach the Brexit negotiations.

Mrs May said that Britain will leave the EU by 2019 at the latest after she announced that she will trigger Article 50 (the formal process by which we exit the bloc) by March next year. Mrs May also confirmed plans for a Great Repeal Bill to repeal the 1972 Act of Parliament which took Britain into the EEC.

The speech appears to point towards what commentators have described as a Hard Brexit, where the UK extricates itself entirely from the European system, thereby giving up any single market access and approaching the European Union as any other third party would. It appears a “hard Brexit” is now on the cards, expect the roller-coaster to continue!

Germany: Deutsche Bank giving European markets the jitters

Germany business leaders have jumped to the defence of Deutsche Bank after a week of market turmoil in which the banks shares have collapsed further.

The bank is reeling from last month’s USD 14 billion fine for mis-selling mortgage backed bonds before the financial crash of 2008. Over the weekend, business leaders spoke to German newspapers to back CEO Cryan’s efforts to turn around Deutsche, which is a linchpin of the national economy.

At one point one Europe’s biggest Investment Bank, now the firm’s market capitalisation is barely holding above EUR 16 billion, roughly a quarter of British banking behemoth Lloyds Banking Group. Even once the bond mis-selling settlement is reached, Deutsche Bank faces an investigation into its activities in a number of other jurisdictions, including Russia, while over the weekend some staff were charged in Milan in connection with falsifying the accounts of Italy’s third-biggest bank and manipulate the market.

Who ever said Germany was immune to economic woes, time to eat your bratwurst!

 

FX Forecast

EUR/USD traded the range last week and struggled to break any of the main support or resistance measures at 1.1122 and 1.1326 respectively. With Deutsche Bank woes impacting European markets, we expect the Euro to be on the back foot this week, especially against the Dollar (perhaps with the exception of GBP). With this in mind, expect a mixed bag on the pair with trend continuing to the downside.

GBP/USD struggled to gather any momentum last week and geo-politics did a good job of pushing the pair well below 1.29. Given the PMI’s are likely to disappoint this week, we expect the bearish trend to continue, with 1.27 a likely support level for the Pound. Should we see some better than expected prints there may be a correction, however the 1.30 pivot is unlikely to be broken.

GBP/EUR is also struggling to maintain momentum, with the pair blasting through 1.15 and approaching the 88 pence level. Despite the Euro’s problems, markets are watching Brexit news extremely closely and continue to push Sterling onto the back foot. With this in mind, we expect the pair to continue to trade to the downside with 1.1300 potentially on the cards.

 

Economic Calander for the Week

UK Data:

We have the all-important PMI’s this week for the UK, with Manufacturing PMI kicking off the round on Monday. We expect a small slowdown in the figure although it should remain above the critical 50.0 level of contraction, posting a 52.1 figure versus last months 53.3.

On Tuesday we await Construction PMI, which again is likely to disappoint with a 49.0 print expected versus last months 49.2. Finally Services is the big one, with the index expected to also drop from 52.9 to 52.0 on the month.

US Data:

Most of the US data is batched up later on in the week, with ISM manufacturing the only release of note on Monday. Non-farms are the highlight with an increase of 170,000 widely expected this month.

Also on Wednesday we should see ISM Non-Manufacturing post minor gains from 51.4 last month to 53.0. Friday we will be watching the unemployment rate and payrolls, all of which are expected reasonably flat on the month but any surprises should trigger a stronger Greenback.

EU Data:

Europe has a light week with German Manufacturing the highlight of the week. We expect the print to be roughly flat on the month at 54.3, however there is scope for a bullish print given the relative strength of the German economy at the moment. German Industrial Production is also expected on Friday, with a return to growth widely expected after last months shock -1.5 percent print. All in all, a slow week for the continent.

 

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