In the week that Parliament returned from summer recess, there was a lot of drama over Brexit which spilled over to the pound. Early in the week, the prospect of an imminent general election caused the pound to fall an average of 0.8% against other major currencies on Monday.
There was nothing in the ecostats to lift the political cloud; the manufacturing purchasing managers' index from Markit came in at 47.4, a seven-year low, like-for-like retail sales fell by0.5%, UK consumer confidence fell three points to -14 and business confidence was at its lowest since records began in 2012. This left all eyes on Brexit and there was much to see.
The Prime Minister lost his slim majority of one when an MP defected, a cross-party group of MPs succeeded in taking control of the House to move forward on a Bill aimed to prevent a no-deal Brexit and 21 Conservative MPs had the whip removed after voting against the PM. Sterling strengthened in anticipation that the Bill would succeed, but Johnson’s lack of majority adds another layer of political uncertainty. The PM’s call for a general election was voted down with opposition leader Jeremy Corbyn stating that the priority was preventing a no-deal departure. Any further certainty on this front may assist the pound.
However, there was also positive indications from Bank of England governor Mark Carney, who stated to the Parliamentary Treasury Committee that due to the preparations already made in the event of a no-deal departure, "the impact of a no-deal Brexit would be less severe than first thought." His statement may have got lost in the dramatic news cycle, but it did not go unnoticed by the market and the pound strengthened by an average of 0.7% against major currencies. Brexit uncertainty continues to be a major influence on sterling and future developments in the coming weeks may cause further volatility.
Manufacturing data across Europe were higher on the month, but five of the eight were still below the 50 mark; the headline for the accompanying PMI statement was “Eurozone manufacturing slump continues in August.” Germany’s numbers were the weakest at 43.5 and together with the fact that orders have been falling across the Eurozone at the fastest pace in six years, the euro was under pressure.
It wasn’t all bad news for the euro, however, which made gains midweek against a weakened US dollar and the market welcomed the new coalition in Italy, which means that another general election has been averted. The main focus currently is on the plans of the European Central Bank (ECB). The ECB is due to meet next week and the market is anticipating a change in policy and the possibility of a cut in interest rates, a return of the quantitative easing programme or possibly both. Changes from the ECB are likely to impact the euro and investors will be watching closely in the run up to the meeting on 12th September for any indications of which way the ECB may be moving.