No Deal…. Yet

As the EU Heads of Government Summit gets underway in Brussels this morning negotiations continue to find an acceptable deal for the UK to leave the group.

Yesterday’s talks were characterized by rumour and counter rumour about the basis of a deal having been completed, then concerns over the Irish Unionists. The pound surged to a high of 1.2880 versus the dollar as the Irish Broadcaster RTE reported that “a major stumbling block had been removed” but still no announcement came.

Any agreement, as and when it is announced will still have to be passed by the UK Parliament. There is a feeling in Brussels that the deal is maybe even more perilous than the one agreed a year ago since Boris Johnson’s position in the UK Parliament is even more precarious than Theresa May’s was then.

Given the antipathy towards the minority Government, the opposition parties, two of which (Lib Dems and SNP) are outright anti-Brexit could block a deal for totally political reasons although this could be suicide for Labour with an election looming.

Johnson’s promise to leave the EU with or without a deal by 31st October hangs by a thread this morning but there is a great deal more positivity than there was a week ago with senior EU officials “queuing up” to make bullish comments.

It remains to be seen whether a deal can be completed this morning and, once agreed, what the text of it will be. Meanwhile, the markets remain convinced that a deal will be reached although any disappoint will see the pound reverse its gains from this week very quickly. Following the high seen yesterday, it closed at 1.2831. It is also rallying strongly versus the single currency, reaching a high of 1.1631 and closing at 1.1587

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Dollar reacts to weak data

The dollar index continued its recent correction yesterday as retail sales data disappointed the markets. The data although negative for the economic outlook is not in itself enough to point towards a rate cut at the upcoming FOMC meeting.

Traders are still unsure about the stance of several members of the committee following a slew of speeches this week. None of the speakers specifically mentioned their own rate expectations. Lael Brainard who is considered an “inflation dove” spoke yesterday of her dislike of negative real interest rates., That is the closest anyone has come to discounting a rate cut.

President Trump continues to “shoot from the hip” when deciding foreign policy, yesterday commenting that the fight over land in Northern Syria was “none of America’s business” and that “American troops are “not in harm’s way” as is right and correct”. That is despite Russin troops moving into the region vacated by American troops just 24 hours earlier

Despite numerous rumours about progress or otherwise from ongoing trade talks with China, it is the economy that continues to exercise analysts and commentators. With further data to be released between now and 31st October, the date of the next FOMC announcement, there is plenty of opportunity for further volatility.

The dollar index traded down below the 98 level yesterday, reaching a low of 97.90, although it rallied a little on profit-taking into the close, ending at 98.02.

Effect of German stimulus questioned

Rumours abound about a package of economic stimulus measures that are apparently about to be announced by the German Government. The likely positive effect of these is counterbalanced by the fact that it could also be the first step in Germany “going it alone” and abandoning the unity of the EU.

Fiscal stimulus has become the “keystone” in modern economic measures. This was started by President Trump in the U.S. and had a highly positive effect that was stymied somewhat by the Fed’s reaction to the stimulus by hiking rates only to be forced to reverse that move.

Given that there is no unified fiscal policy in the Eurozone, any move by individual nations will have to be in line with the strict budgetary controls that exist. It is ironic that past German insistence on financial discipline is now holding back its desire to radically stimulate its economy which is, to say the least, going through something of a “soft patch”.

Germany is rumoured to be now seriously considered what stimulus can be added following rumours that have been around for a couple of months now. Angela Merkel’s government was forced to lower its forecasts for 2020 growth earlier this week which may be the final push necessary to enact the ideas that have been floated recently.

Yesterday, the euro rallied against a weaker dollar, reaching a high of 1.1086, before closing at 1.1071.