Brexit accord inching closer
February 21st: Highlights
- Sterling closing on 1.31 versus the dollar
- Fed minutes add to pause to versus end of, hiking cycle discussion
- EU concerned about hard Brexit and its effect on the economy
Brexit breakthrough a possibility
There has been growing conflict between Brussels and Germany, France and The Netherlands over the determination to “punish” the UK for Brexit.
Spain’s Foreign Minister confirmed that a deal is being hammered out but he said that despite Brussels determination to stick to the deal as negotiated, it can be complemented or interpreted in a manner which could satisfy the UK Parliament.
News that three government MPs have defected to the new Parliamentary group created by seven opposition MPs had little effect on the market. This is likely to be a story that will have a greater effect post-Brexit. The fact that MPs from the two main parties see sufficient common ground on matters other than Brexit to band together will be significant going forward.
The pound also rallied against the single currency remaining well above 1.1500.
With optimism over Brexit and encouraging economic data, Sterling still has the potential to rally further, but the shadow of no deal remains.
Patience is a virtue
The dollar index continued to correct lower throughout the day but given the show of agreement by the FOMC, the greenback appears to be basing out, in the short term at least.
It traded in a range of 96.29 to 96.65 and closed at 96.53.
Tomorrow’s release of the Philadelphia Fed Index of Manufacturing together with the notoriously fickle durable goods orders data will provide the dollar with short term direction but traders will now look towards the next Fed meeting on March 19/20.
As trade talks continue between the U.S. and China, and a summit between Donald Trump and Kim Jong-un is scheduled for next week in Hanoi, U.S. foreign policy considerations may take on greater significance in the meantime.
Brexit concerns starting to grow across Europe
Fears have been growing in corporate entities across the larger EU economies regarding supply chain disruption. Those concerns have so far failed to have much effect on those countries’ Governments.
Several countries seemed to have an individual ‘gripe’ with the UK which was precluding them being more positive about trying to reach a mutually beneficial agreement. For example, Spain was using its bargaining power to try to get concessions over Gibraltar and Germany wanted to ensure that the divorce bill would be paid in full irrespective of the outcome of talks.
Now, as the Eurozone economy starts to nosedive towards recession, a more conciliatory attitude is being seen, and, aided and abetted by large corporates, the countries of the EU are starting to pressure the European Council and European Commission to find a way to get a deal done.
This has provided a boost to the pound as already seen and a positive outcome should slow any further slide in the single currency.
As the dollar weakened, the euro reached close to resistance at 1.1380 but following the release of the Fed minutes, it fell back to close at 1.1347.
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.”