Brexit: Will Article 50 be triggered this week?
(Yann Quelenn, market analyst)
As Brexit proceedings drag on and fears of a hard Brexit continue to loom large, the pound continues to paint a very vivid picture of market worries. At present, UK Parliament remains split on PM May’s EU exit plans with The House of Lords meeting today to debate its proposed amendments.
The outcome however will be of little relevance as May will plough on and trigger Article 50 regardless. From that point, Britain’s EU divorce will take up to two years to complete but in our view, likely much longer as the UK will surely negotiate bilateral agreements. The question on everyone’s lips right now of course is whether the PM will cut the cord with no actual deal in place.
Currency-wise, the pound has been feeling the heat from both the single currency and the greenback over the past couple of weeks on the back of renewed hard Brexit fears. In our view, we believe that there is a strong opportunity to reload bullish pound positions. In our view, the dragging out of these proceedings will be more damaging than the actual exit itself. Brexit will not be the promised apocalyptic nightmare and will allow the UK breathing space to regain its competitive stance, free from constraint from Brussels.
USD tumbles as real wages dip into negative territory
(Arnaud Masset, market analyst)
The US dollar had a tough start into the week as investors remained unmoved after Friday’s job report and even appeared disappointed amid lacklustre data. The US economy created 235k private jobs in February, widely beating the median forecast of 200k, while the previous month’s reading was upwardly revised to 238k. All employment measures improved in February as the unemployment rate eased to 4.7% as participation climbed to 63%. The U-6 measure or the underemployment rate fell to 9.2% from 9.4% a month previous. So, after such a bullish report how come the USD came under pressure this morning?
Well, there are a few explanations for this. Firstly, wage growth clearly failed to impress despite the solid pace of job creation as average hourly earnings grew 0.2%m/m versus 0.3% expected. Indeed, inflation pressures have intensified over the last few months as crude oil prices recovered - the consumer price index reached 2.5% in January. However, nominal wage growth remained stable, which translates into weaker purchasing power for the common American. Looking at how the measure adjusted for inflation, one immediately notices that real wages contracted 0.52%. This is the first time since December 2013 that the gauge has dipped into negative territory. In fact, since December 2015 real wage growth has started to decelerate and actually contracted last month. This negative trend could explain why the Fed was not in such a hurry to raise rates last year. Looking forward, it should not influence Wednesday’s meeting as Janet Yellen cannot take the risk of disappointing the market, especially after selling that rate hike for the past few months. However, it will definitely impact the Fed’s tightening path as the Fed will find itself on the hot seat. On one hand, it will have to control rising inflationary pressures, although the core measure remains stable; while on the other, if the Fed adds too much pressure too quickly on the economy, by increasing borrowing rates, it will slow - if not reverse - the current fragile recovery.
All in all, in the short-term the market will stay focussed on the mounting political risk in Europe, which would help the dollar to hold ground. The dollar’s medium-term outlook is heavily dependent on the results of the EU political elections; however, should the political chessboard stay unchanged, the USD will start to reverse gains.