May loses closest ally
December 21th: Highlights
- Prime Minister exposed as Green departs
- Fallout from Financial services row to be long term issue
- Activity slowing as traders close books
May’s Cabinet support draining away
The fact of his departure is far more significant that its reasons as it leaves Mrs May exposed to the more hard-line members of her team and removes one leg of her support mechanism. May has relied upon Green to ensure that the more hawkish members of the Cabinet understand that unity, at least in public, is the most sensible tactic given the parlous state of the Government’s minority status.
The effect of the news of Green’s departure won’t be felt until the New Year when discussions begin in earnest over the proposals for stage two of Brexit. Following the farcical situation that developed yesterday when the UK made a conciliatory gesture over financial services only to be slapped down by Brussels confirming that the UK would be excluded from the “financial passport”, means that the tone has been set for stage two of negotiations.
It is too early to tell the political ramifications of Damian Green’s departure but there is little doubt that May will be weakened as she tries to unify her Cabinet behind a soft-Brexit stance.
Market too uninterested to provide verdict on Financial Services disagreement
The UK offered to allow EU banks to remain in London with no change to their status, a move that will save the likes of Deutsche Bank and Société Générale billions as they will not have to capitalize their branches into subsidiaries.
Meanwhile the EU set the tone for stage two negotiations by confirming that the UK wouldn’t have access to the single market as a holder of the financial passport which allows banks with operations in one EU member state to operate in all under a single regulatory body. It is almost as if it was hoped that this “shot across the bows” would pass under the radar but it could turn out to be significant not only of itself but also as a pointer to what can be expected when talks resume in March after an over long consultation period.
Traders shrugged off the news, treating it as an issue for 2018, almost accepting that despite the Government’s clear soft-Brexit stance, a hard-Brexit or no deal scenario is never going to be far away.
Sterling drifting as market winds down
It is a similar story for the Euro and dollar. The Euro is struggling to break resistance at 1.1880 for both technical and fundamental reasons. Traders would like to buy the Euro but see a concern over U.S. monetary policy until Jerome Powell’s views are fully understood once he takes over as Chairman of the Federal Reserve. The Eurozone economy is growing, and inflation remains benign. However, the withdrawal of stimulus is not going to happen in the short term which is to the dollar’s benefit as interest rate differentials mean it is becoming more expensive to be short of the greenback.
Tomorrow sees the final major data release of 2017 as the final cut of U.S. Q3 GDP is revealed. It is unlikely to surpass the 3.3% that was announced a few weeks ago, but were there to be a surprise there could be a disproportionate response from, what will be by then, an extremely thin market.
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.”