Budget Unlikely to Bring Clarity
Morning mid-market rates – The majors
November 22nd: Highlights
- UK Chancellor to unveil fiscal and spending plans
- Davis expecting Brexit agreement but prepared for “no-deal”
- Euro remains mired in German Political woes
Hammond to clarify Brexit Funding
There are growing expectations that the U.K. will offer forty billion euros in total, staged over three years as its contribution to the EU budget following Brexit. This is a significant increase on what the more hawkish members of her Cabinet believe should be promised and is also more than May offered in her speech in Florence in September.
The EU have constantly stalled on the move to stage two of talks where the future relationship will be discussed saying that there hasn’t been sufficient progress over the three primary issues they expect proposals on. The budget contribution is not even necessarily the most contentious issue. Although the EU negotiators are prepared to tell the U.K. what isn’t enough they are not willing to say what is, which has created a very lop-sided process.
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Sterling holding its own, for now
It could be the case that “no-deal” becomes many commentators base case if the EU reject a forty billion euro offer or place any other obstacle in the way of progression in the talks.
Sterling is balanced on a knife edge where, simplistically put, if there is acceptance of the new offer by Brussels, sterling will rally but if it doesn’t and stage two is delayed again, Sterling will fall. Either move will be sharp and given the time of year and the drop in liquidity any move will be magnified.
Yesterday the pound traded in relatively narrow ranges against the dollar and euro. It reached a high of 1.3265 versus the dollar but drifted back to close virtually unchanged at 1.3233. Against the single currency it closed a shade lower at 1.1273 despite having reached a high of 1.1309. Pressure is building for a significant move following any Brexit decision which will contrast with the rate hike decision earlier in the month as the outcome, if not the market’s reaction, was priced in.
German political concerns halt Euro progress
Angela Merkel’s failure to bring together a coalition followed by her seeming disagreement with the President, Hans-Walter Steinmeier over the next move has slowed its progress. Mrs Merkel doesn’t want to preside over a minority Government since the antipathy of her previous coalition partners when coupled with the AfD party, who vehemently oppose her stance on immigration, mean that she would have trouble passing any meaningful legislation. Her preference is for fresh elections although what part Mrs Merkel will be prepared or allowed to play following them is open to discussion.
The Euro recovered a little versus the dollar from its fall following the announcement of the problems in Germany but that is more due to uncertainty facing the U.S. over the future path of interest rates. It reached 1.1756 although any further progress should the German situation be resolved will be hampered by strong resistance between 1.1820 and 1.1850.
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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.”