Daily Market Brief 29 September 2017

Carney opts Out of Brexit

September 29th: Highlights

  • Governor doesn’t have tools to mitigate effects
  • Prime minister acknowledges effect of low rates on savers
  • Dollar supported by tax plan and rate hike hopes

Sterling lower as Carney admits he cannot nullify Brexit effect

In his first speech since the most recent MPC vote Mark Carney the Governor of the Bank of England told his audience which included the Prime Minister that the Central Bank didn’t have the tools to nullify the effect on the U.K. economy of the U.K.’s exit from the European Union.

At an event to commemorate the twentieth anniversary of the Bank being given independence to decide monetary policy, Carney expressed his concerns over Brexit as a major drag on the U.K. economy warning that Britain’s future prosperity hinges upon final arrangements for the departure and the Government’s fiscal policies.

Sterling fell against the dollar reaching 1.3342 following Carney’s remarks, before recovering as the greenback weakened with the expectations over an immediate agreement regarding Trump’s tax reform plan fading.

At the same event, Theresa May, said that the effect of low rates on savers may need to be mitigated. This has been an issue for several years but as the global economy recovers, the focus will turn onto the continued reliance of stimulus to drive economies although given the headwinds facing the U.K., the withdrawal of such measures will lag the U.S.

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Dollar rally hinges on rate hike expectations

Fed Chair Janet Yellen’s unusually hawkish comments removing data dependency from future interest rate decisions has provided support for the dollar as hopes for rapid progress over fiscal reform have faded.

The dollar has tested resistance against the common currency at 1.1710 but has fallen back reaching 1.1805 as previous support for the Euro at 1.1820 provides resistance.

The fallout from the German election continues to affect the Euro with Chancellor Angela Merkel having to be accommodative to her new coalition partners to ensure that another election doesn’t ensue. Merkel will face a hostile Reichstag as she has signalled that she will continue to play a prominent role in EU reform. She has confirmed she is willing to engage with French President Emmanuel Macron who recently laid out plans for greater cooperation over several issues confirming that she felt there was consensus over many Macron’s proposals.

Macron sees reforming Europe as a major plank of his Presidential agenda since he sees closer links as the only way the French economy can return to prosperity. He supports the strong stance being taken over Brexit and will try to look beyond the U.K.’s departure when proposing further reform.

Brexit talks grind to a slow halt

Every round of talks between the EU and U.K. seems to be taking on a familiar pattern They start with an optimistic David Davis looking forward to “fruitful discussions” and Michel Barnier exhibiting caution over the absence of concrete proposals over the “divorce bill” and the treatment of EU citizens remaining in the U.K. after Brexit.

Then after a week in which David Davis has been in back in the U.K. only to return for the final session, he calls for greater flexibility and imagination from the EU while Barnier rues another missed opportunity and reiterates that the clock is ticking.

The frustration of the EU negotiating team was clear at the end of this week’s session as Barnier said the next talks could be in a few weeks or a few months, underlining his view that no progress is being made.

The U.K. seems to be almost heading towards a hard Brexit of its own making as in actuality, the two sides only have a little over a year to complete negotiations to prepare for departure in March 2019. Even Theresa May’s proposal of a transition period of two years hasn’t, yet, been agreed so the clock is definitely running down.

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.”