houses of parliaments

Brexit Deal ‘Close’

12th October 2018 Market Update

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?? GBP – Reports out of the Financial Times this morning claim that Theresa May has briefed her inner cabinet that a historic Brexit deal is close, with the key issue of the Irish backstop close to being settled. However, as it currently stands – there is talk that two Eurosceptic cabinet ministers (Andrea Leadsom and Esther McVey) were ready to quit if May agrees to the backstop agreement in its current form. More significantly, the DUP has also threatened to walk out of the PM’s minority government if Northern Ireland remains part of the EU’s single market regulatory area. And as if that weren’t enough, there is also talk of a backlash from within her own party who fear that the UK could remain in a customs union with the EU.

While it was never likely that a deal could please all parties, these threats are serving to keep any Brexit deal optimism in check. As such, negotiations are likely to run into the weekend ahead of next week’s key October EU summit (17th-18th). With reports of a deal being close – the Pound remained buoyant overnight, but has since come off as these threats from MPs have started to hit the news this morning.

?? USD – The Dollar hit 3-week lows against the Pound and two week lows against the Euro last night as slightly lower than expected CPI figures alongside a fall in US Treasury yields weighed heavy on the greenback. Firstly, as a result of hawkish forward guidance by the Fed, the CPI figure was either going to provide evidence to support or nullify President Donald Trump’s recent attacks on the Fed, who he has claimed have ‘gone loco’ and are ‘out of control’. Expected in at 2.4 percent, the 2.3 percent figure, whilst enough to back up the Fed, did cause some Dollar weakness as investors questioned the likelihood of another four rate hikes by the end of 2019. As such, the US Dollar index traded flat this morning at 95.00, down from its monthly high of 96.15 on Tuesday. Looking ahead today, we see another data light day in the US, with a speech from the Fed’s Charles Evans being one of the few highlights. Away from the rates, markets remain very much more focused on the US Equity market as yesterday also saw the S&P make its largest two-day decline since February.

?? EUR – Eurodollar was one of the main beneficiaries of the aforementioned Dollar weakness as it hit its highest level for October 2018. In addition, the ECB minutes out yesterday indicated that everything was on track to normalise monetary policy as inflation ticks up despite concerns about the low growth in Europe. This is some rare positive news for the Euro ahead of the crucial submission of the Italian budget on October 15th next week. In addition, this weekend sees the German state election in Bavaria, which could spell further bad news for German Chancellor Angela Merkel with fears that her CDU party could lose its overall majority amid an increase in populism and anti-government sentiment. Data-wise, the rest of today will likely be a sanguine one for the Euro, due mostly in part to a lack of catalysts after German CPI figures came out in line for both YoY and MoM.

 

Summary: 
GBP: With reports that a Brexit deal may be close, focus turns towards getting any agreement through the House of Commons as dissenting voices are heard;
USD: Dollar has an off-day after lower than expected CPI and consequential fall in bond yields;
EUR: Quiet day for the Euro ahead of significant weekend in Germany and big week in Italy.

 

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Ali Malik

Ali Malik

Ali is responsible for providing clients with relevant foreign exchange advice, daily reporting and pricing to ensure they are updatede of all market moves. His experience includes working for Goldman Sachs, UBS and Lloyds Development Capital.

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