Fox foxed by Brexit Borders
EU Council President Donald Tusk stated that it was possible the December Council meeting could be when the EU agrees to move onto trade talks, but that it remains a huge challenge. Prime Minister Theresa May stated that progress had been made and that the atmosphere was very positive. Positive tones supported Sterling during Friday with gains in oil prices also positive. Dollar weakness was the main focus as Sterling peaked near 1.3340, a seven week high. Sterling remained on the defensive against the strong Euro which pushed the Pound down to the 1.1173 area.
Over the weekend, the Irish government warned that it would take a headline stance over Brexit talks due to concerns over the Northern Irish border. Secretary of State Liam Fox stated “We don’t want there to be a hard border but the UK is going to be leaving the customs union and the single market,”. Donald Tusk also warned that a breakthrough was needed by December 4th for a deal on trade talks at the mid-December Summit and Sterling edged lower on Monday amid expectations of high volatility.
Political uncertainty in Germany was a large talking point for the Euro in the early part of last week, causing mild volatility but a set of firm data, potential resolution to the political state and boost in outlook for the Euro caused the single currency to rally.
Against the Pound, the Euro strengthened to finish the week 1.1177 falling from highs of above 1.1300. A similar story against the Dollar as after a slight fall in the early parts of the week, the Euro rose to highs of 1.1930.
On Friday, German IFO index showed a firm reading, rising to 117.5 for November, beating consensus expectations and a fresh record high. This demonstrates the confidence in the outlook for Germany despite a small decrease in the current conditions component but was able to help set an underlying tone for the Euro, especially when taking a stance on tightening monetary policy.
This week has a quiet start but Wednesday and Thursday will be important as inflation data and unemployment rate respectively are out. The Euro-zone inflation data is also out Thursday which will be watched closely by traders and investors alike for signs that the economy is ready to begin the tapering programme.
The US Dollar has weakened across the board, undermined in part by more dovish Federal reserve (FED) rhetoric. Persistently low US inflation is beginning to create more concern at the Fed with the flattening of the US yield curve also sending a cautionary signal. The Fed is still likely to follow through with one more hike this year, although their plans for a further three hikes in 2018 could prove too aggressive.
The Greenback still remains out of favour amidst the persistent lack of clarity in the US political scenario, particularly regarding the US tax reform. In this regard, President Trump will meet with Senate Republicans later in the week.
The release of the latest PCE deflator report and speeches by Fed Chair Yellen and Vice Chair Dudley are the main event risk in the week ahead.
Data To Watch
09:00 EUR EU Financial Stability Review
15:00 USD New Home Sales Change (MoM) (Oct)
15:00 USD New Home Sales (MoM) (Oct)
15:30 USD Dallas Fed Manufacturing Business Index (Nov)
22:30 USD FOMC Member Kashkari Speech