Exit prep first, then trade negotiations…
Brexit talks between the UK and remaining EU members formally started yesterday. It has been agreed that the discussion will be split into three areas; financial settlement, citizen rights and other separation issues. Although the tone was friendly on the surface, chief EU negotiator Barnier stated that there would be a tough stance given that the UK instigated the withdrawal, and Brexit Minister Davis was forced to concede on the sequencing of talks ie. trade deal talks come last, not concurrent.
The soon to be ex-member of the Bank of England MPC, Forbes, continued to warn that Sterling weakness would mean inflation rising above 3.0%. Silvana Tenreyro was appointed to replace Forbes on the MPC, but no clear indication yet on whether she’ll be a hawk or a dove.
Sterling hit resistance above 1.2800 against the Dollar before gradually retreating to below the 1.2750 level, and there was no significant change against the Euro.
New York Fed President Dudley stated his expectations that wage rates and inflation will increase over the next few months. He was confident in the outlook for the economy and stated that a flattening of the yield curve was not a cause for concern as it reflected international factors. Significantly, he stated that the economy could be endangered if the tightening cycle was halted.
Futures markets indicated that the chances of a further rate increase at the December meeting had increased to around 47% from 41% last week, which provided some net US currency support.
As the Dollar gained support, the Euro retreated to lows just below the 1.1150 level. Chicago Fed President Evans stated that it might be worthwhile to wait until December to raise interest rates again. He also downplayed the risk that recent softer inflation data would delay balance sheet tapering and the Dollar held steady, although the Euro edged above 1.1150.
Whilst European politics still concerns investors, France isn’t a concern after market-friendly presidential and parliamentary election outcomes. Macron’s strong mandate means there may be concrete domestic policy action in France relatively soon.
European Central Bank governing council member Smets stated that the central bank will have to decide on the future of the bond purchases programme before the end of 2017, although there was no immediate impact on the Euro.
Data to watch:
7am EUR German Producer Price Index.
8.15am US Feds Stanley Fischer Speech.
8.30am UK Mark Carney Speech.
9.45am Switzerland SNB Chairman Jordan Speech.