Brexit uncertainty, falling average earnings and a very cautious sounding Mark Carney provided a toxic combination that sent the pound sharply lower on Tuesday.
Theresa May continues to cling onto power, however a failed attempt to send MP’s on summer break early to avoid a leadership challenge, shows just how desperate her situation has become. Any political challenge at this stage is almost certainly going to result in a no deal Brexit.
Timing is everything they say. Another dent to Theresa May’s authority came as BoE Governor Mark Carney warned that a no deal Brexit would have big economic consequences, prompt a review of interest rates and leave many bankers idle. The conclusion so far being that a no deal Brexit is increasingly likely as Theresa May’s authority diminishes, which could lead to loser monetary policy to support a hard hit struggling post Brexit economy – understandably pound traders are selling out hard.
UK wages growth slows as expected
The UK wages data did little to distract traders from the deteriorating landscape. Whilst UK unemployment stayed constant in June at 4.2%, in line with expectations, average weekly earnings, excluding bonuses slipped to 2.7% in the three months to May, down from 2.8% in April. Falling average earnings suggests lower inflation down the line. Whilst the numbers are far from disastrous, this is hardly encouraging data for the BoE as they mull over whether to hike rates when they meet in two weeks’ time.
There was however a silver lining to the data, as the number of people employed hit 32.4 million, the highest since records began. At last a piece of good news for Theresa May, but more importantly a number which will add support to the BoE hawks. The problem being though, that although people are being employed, firms are refusing to budge higher on the wages. Despite the ray of light in the otherwise sluggish jobs data, pound traders were in no mood for buying.
Fed Chair’s testimony in focus
A stronger dollar today is doing little to help the pound as it dives lower. Dollar traders are looking ahead to Fed Chair Jerome Powell’s bi annual testimony before the Senate Banking Committee, where he is broadly expected to continue with a hawkish message of 4 hikes across the year. Given that the market is not confidently pricing in 4 hikes, further confirmation of the message is expected to lift the dollar further.
The pound has bounced off support in the region of $1.3150, after tumbling from a high of $1.3269 earlier in the day. A strong show of Powell’s hawkish nature in front of the Senate Banking Committee could see the pound target support at $1.31 before moving towards $1.3050.
The FTSE moved towards the end of the day in positive territory after slipping into the red mid-session. Whilst the weaker pound and encouraging earnings from the likes of Royal Mail supported the index, a softer opening in the US could yet pull the FTSE back below the flat line threshold to end the day.