UK Brexit Plan? Just another fudge!
June 8th: Highlights
- Brussels and market unimpressed
- Euro gains on QE hopes
- Dollar suffering from several headwinds
Now, it’s up to Brussels
A series of Ministers have had their say on the proposals, including the Foreign Secretary, Trade Minister and of Course the Brexit Minister himself.
David Davis who has been the UK’s Chief Negotiator since talks began demanded that the Prime Minister insert an end date to the “backstop plan” under which the UK would adopt EU tariffs in order to keep a soft border between the North and South of Ireland. This will remain in place even longer than the transition period, ending in 2021, although Mrs May has refused to confirm that the date won’t be extended.
EU Chief Negotiator Michel Barnier will speak later today on the proposal but has already said that the proposals will be studied further and need to be “workable”. Guy Verhofstadt, the EU Parliament Brexit coordinator has already labelled the plan unworkable.
The FX market was similarly unimpressed but demonstrated that, since most traders are already short of GBP, the downside for the pound is reasonably well protected and it will take a major shock to push it lower. It closed at 1.3423 against the dollar, just ten pips higher than its opening level although it ranged between 1.3371 and 1.3472 during the day.
Euro recovery continues
The single currency tried, and failed, to break through strong resistance at 1.1820 yesterday, reaching 1.1840 before retreating late in the day.
Continued rumours that the ECB will discuss the tapering of its Asset Purchase Scheme at next week’s policy meeting have run out of a little steam since discussions could go either way, particularly considering ECB President Mario Draghi’s stated position on low interest rates and accommodation remaining in place as long as possible.
The single currency made better progress versus the pound following the announcement of the Brexit “backstop” plan reaching 1.1315 before the pound recovered late in the day, closing at 1.1374.
Unless there is a significant comment on the withdrawal of accommodation, the euro is unlikely to rally much ahead of the meeting which will take place next Thursday.
With the debt crisis threatening to overwhelm Italy since the country has been the major beneficiary of ECB bond purchases and the Government still formulating plans that will require a high degree of fresh funding, there are still issues that will cloud positivity gained from any announcement over the withdrawal of accommodation.
In what has, so far, been a year of growing issues, the EU and Eurozone are concentrating on simply maintaining, as far as they can, the status quo with expansive plans for a move towards greater Federalization on hold for now.
Dollar and U.S. facing a pivotal week
With the dollar index looking to have “topped out” following the euro finding support, next week’s FOMC meeting will be the most significant of the year so far. With a hike to short term rates already “in the bag” as far as traders are concerned, their thoughts have already moved on to the prospect for rates for the rest of the year.
The market will pore over Jerome Powell’s comments following the meeting looking for clues as to whether the expectation is for one or two further hikes this year. With the possible withdrawal of accommodation in the Eurozone likely to be followed by rate hikes in 2019, if the U.S. hikes four times this year, the dollar will almost certainly maintain an interest rate advantage over the single currency during the whole of this cycle.
The other major event next week is the U.S./North Korea summit which will take place on Sentosa Island, Singapore. Just what the outcome of talks between Trump and Kim will be is matter for conjecture and most attention will be upon the communique following the meeting, the wording of which will be as closely scrutinized as it is carefully written.
The dollar index has weakened over the week but not significantly as the markets await next week’s developments it closed yesterday at 93.43 and is well supported around 93.20.
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.”