07 Nov 2018: Sterling 3% higher on Brexit optimism

07 Nov 2018: Sterling 3% higher on Brexit optimism

Sterling 3% higher on Brexit optimism

November 6th: Highlights

  • Fears over domestic “backstop backlash”
  • Democrats secure lower house victory in U.S. Midterms
  • Fears for single currency as “Italy will never kneel again”

May to face down angry Brexiteers

Rumours of a deal to end the deadlock over Brexit negotiations have sent the pound soaring by 3% over the past week.

Despite the Brexit Secretary demanding a backstop deal over the Irish border that the UK could cancel after just three months (which was rejected by Dublin) and EU Chief Negotiator Michel Barnier commenting that a deal is “not yet close to being complete”, the market has taken a significantly more optimistic view of the negotiations and driven Sterling to a high of 1.3151 overnight versus the dollar and to a five-month high versus the euro at 1.1479.

There is still an underlying feeling that all this could again come to nothing as there have already been several false dawns in the negotiations. Traders are still reluctant to go outright long of Sterling, but the overall market position has become more balanced as those who have been short of the pound have squared their positions.

Last evening’s Cabinet meeting at which Prime Minister Theresa May updated her colleagues on the negotiations appeared to end on a more positive note although if the rumours of a deal over the backstop are true Mrs. May could face a backlash from those of her MP’s who favour “no deal over a bad deal” since an extended backstop keeps the UK complaint with Brussels rules without a vote on their constitution.

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Blow to Trump as Democrats take House of Representatives

If Donald Trump had been frustrated over the first half of his term as President, things are going to start to get a lot tougher as he will now have to deal with a Lower House that is hostile to his policies.

Projections confirm that the Democratic Party will win the 23 seats necessary to take control of the House of Representatives although the Republicans have tightened their control of the Senate. While a more balanced Congress is seen as reining in the President’s more radical proposals, it can have a negative effect of almost creating a vacuum where the business of Government grinds to a halt.

The dollar has so far taken the news badly. The index has fallen to a low of 95.89 with the euro making significant gains.

On a personal level, Congress may now conduct a far-reaching investigation into the President’s tax affairs and conflicts of interest while several of his legislative plans may face curtailment.

The Republicans extension of their slim majority in the Senate which has prompted the President to Tweet “tremendous success tonight thank you to all”, as he reviews how he will carry his administration forward.

The FOMC begins a two-day policy meeting today and while it is unlikely there will be a hike in rates, Chairman Powell will probably provide advance guidance over next month’s meeting and continue his hawkish view on rates and a bullish outlook for the economy.

Ecofin backs Brussels as Rome becomes more isolated

The meeting of EU Finance Ministers which was held earlier in the week has, as expected, signaled its support for Brussels in the ongoing dispute with Rome over its plans for the 2019 budget.

Deputy Prime Minister Matteo Salvini is maintaining the fight from the Italian side commenting in the wake of the meeting that “no little letter will make us back down. Italy will never kneel again”.

French Finance Minister Bruno Le Maire summed up the mood of the meeting commenting that “the wise path is through dialogue to agree what is best for the Eurozone, the Italian Government and the common currency”. He went on to voice concerns that the fate of the euro, while not hanging in the balance, is under threat.

The euro rallied on the news from the U.S. but is under pressure as any sign of contagion or support for Rome’s actions could see it test recent lows.

Economic activity will also be in focus with pan-Eurozone retail sales data due for release this morning while the European Commission will release its growth forecasts tomorrow.

Calls for a more integrated Eurozone, including Eurozone-wide unemployment insurance and a single Eurozone budgetary policy from one of the favourites to succeed Angela Merkel have surprised analysts. Friedrich Merz also called for Germany to work more closely with France. A comment that will have pleased embattled French President Emmanuel Macron.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”