Sterling Driven by Threats and Promises

Hard Brexit becoming a real possibility

Despite conciliatory words and veiled promises, the EU’s leadership have given another ultimatum to the U.K.’s Brexit negotiating team over the three primary issues that they require proposals about before talks can move to discussing the future relationship between the two sides.

The U.K.’s offer over the financial consideration looks likely to be made at forty billion Euros. There are now rumours that the U.K. is set to make concessions over the treatment of EU nationals remaining in the U.K. after March 2019. Any concessions will anger Brexiteers who will see such a move as contrary to the original question asked in the referendum.

The third and final point, the question of the Irish border has come out of nowhere to become the most contentious of the three. The reason for this is that it raises the issues that have seen the North and South of the island be at each other’s throats for almost one hundred years. The Republican South say they will veto any agreement that creates a “hard border” as it could spell disaster for their economy only now recovering from the financial crisis. The Unionist North, who are propping up Theresa May’s minority Government, want a closed border and the Republic to be “cut off” from the rest of the U.K.

Considering your next transfer? Log in to compare live quotes today.

Pound climbing against weaker dollar

The pound reached a two-month high against the dollar yesterday reaching 1.3384 before falling back to close virtually unchanged on the day at 1.3320. This was as much a dollar move as due to demand for Sterling as the greenback continues to suffer from the inability of congress to pass fiscal reformlegislation.

Versus the Euro, the pound has been treading water, capped by traders’ reluctance to buy due to Brexit uncertainty but supported by the issues facing Germany and the easy monetary policy being followed by the ECB.

The pound reached a low of 1.1095 last week but since then has rallied reaching 1.1309 before drifting back into its present range between 1.1150 and 1.1250. There is unlikely to be any significant move out of this range until the EU’s Brexit ultimatum expires although month end buying of Euros could provide a test of support at 1.1080.

As the market thins out through December and year-end approaches, liquidity will dry up a little and with the EU Heads of Government Summit on 14/15 December Sterling could spike in either direction based upon whether a decision is made or not.

Powell remarks to Congress follows Yellen’s path

In prepared testimony to congress to support his confirmation as Chairman of the Federal Reserve, Jerome Powell followed the sentiments of his predecessor Janet Yellen by saying he expects interest rates to rise and the size of the Fed’s balance sheet to fall, both gradually. Powell is likely to tread a different path to reach the same destination. Where Yellen was proactive, Powell will be data-driven. Where Yellen favoured pre-emptive action, Powell will be more pragmatic.

The dollar index has been languishing recently driven by the inability of Congress to make progress on President Trump’s fiscal reform bill. It reached a low of 92.50 yesterday, its lowest since September 25th. The major constituent of the index, the Euro, has risen over the past few days as economic data has been stronger than expected and a solution to the German constitutional crisis appears within Angela Merkel’s reach

Yesterday, two prominent Republican members said they would vote against which could kill the bill and send Trump back to the drawing board.

The dollar is likely to remain supported at these lower levels as Powell’s words could be interpreted as confirming his desire for a hike at the December FOMC meeting although November’s employment and inflation data will be released before then.