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Barnier premium

Oops, he did it again

For the second time in a little over a week EU negotiator Michel Barnier sent sterling to the front of the major currency pack. His method this time was the same as last: talking up the likelihood of Britain getting a  tolerable Brexit deal, this time within six to eight weeks.

Investors took it that his comment - and the proposed timeframe - was related to the scheduling of a European Council meeting for 13 November, which just happens to be nine weeks away. Coupled with the emollient words from Mr Barnier over the weekend the overall impression was - is - that the remaining 27 have come to the conclusion that compromise will do less mutual damage than no deal.

The questions now are what form that compromise will take and whether the Brexiteer wing of the parliamentary Conservative party will resist the temptation to reject it, so as to avoid triggering a general election.  Investors were by and large optimistic about it all yesterday, sending the pound an average of 0.8% higher against the other major currencies. The pound added two yen, almost two Swiss cents, one and a quarter US cents and half a euro cent.

Supporting roles

Prior to Michel Barnier's comment sterling's focus had been on  the slew of UK economic data that came out at half past nine. They were not bad but sterling did not gain much traction during the rest of the morning.

The good numbers were for gross domestic product and the balance of trade in July. GDP beat forecast with a provisional 0.3% expansion in that single month and growth of 0.6% in the three months to July. The monthly trade deficit was £111m: only on three occasions has the deficit been smaller than that in the last 20 years.

On the downside, all four of the monthly and annual figures for industrial and manufacturing production fell short of forecast. Manufacturing output  was down by 0.2% in July with the broader industrial production increasing by just 0.1%. The annual changes were 1.1% and 0.9% respectively.

Wages vs prices

UK employment data are released today, comprised of average earning growth with and without bonuses as well as unemployment statistics. From elsewhere, only the ZEW surveys of German and Euroland investor confidence are likely to have any effect.

A month ago total earnings were 2.4% higher on the year; today that figure is forecast to have ticked up to 2.5%. The most recent consumer price index figures put inflation at 2.5%. So, if analysts have got it right, inflation is eating up pay rises. Investors - and indeed the UK economy - would like to see wages rising faster than prices. For that reason, a number higher than 2.5% would be helpful to sterling.

Analysts expect little or no change to the ZEW measures of investor confidence either in Germany or the euro zone.

 

 

 

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