Critical Cabinet Conference

14th November 2018 Market Update

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?? GBP - Yesterday saw Sterling post its biggest jump in two weeks on news that Britain had struck a draft divorce deal with the European Union after more than a year of talks. As part of the move, Sterling gained 0.3% against the Dollar whilst hitting six-month highs against the Euro as news emerged that with any luck, the UK could yet avoid a ‘hard Brexit’ departure. This is following a breakthrough in talks over the Irish ‘backstop’ deal. As to how they have solved this chimera of a problem remains to be seen, but rumours are currently rife that the backstop would keep the UK aligned with the EU customs union for a limited amount of time; something right-wing Brexiteers have been keen to avoid. Looking ahead, Theresa May must now present the draft withdrawal agreement to her Cabinet today at 2pm, which will be much easier said than done. To start, May still has to win over many members of her own party as well as the Northern Irish DUP, which is currently helping to hold up her minority government. In terms of why this is so relevant for our clients is clear, as the volatility in the Pound has surged to its highest levels since early 2017 meaning that the need to provide some foreign exchange cover becomes all the more essential as a Cabinet approval could send Sterling soaring, while a rejection could have us hit new trading range lows.

?? EUR - The main headline out of Europe late last night was that Italy is sticking to their guns and maintaining the big spending plan with a deficit target of 2.4% alongside growth forecasts of 1.5%. This is after the European Commission was keen to get the deficit below 2% of GDP, and ideally as low as 1.6%. Instead, Italian Deputy PM Luigi Di Maio of the Five Star reiterated that ‘this is the budget needed for the country to get going again’ having previously made vows to end poverty in Italy with such measures as installing a minimum income for the unemployed alongside a number of tax cuts. Such promises, given Italy’s significant debt, (less than only Greece in the Eurozone) means that at present – Italian taxpayers are currently spending as much servicing their national debt as on education. And, as if that wasn’t bad enough, Italy is now facing the potential for billions of Euros of fines due to its failure to comply. Away from Italy, German GDP came out lower than expected on a year on year basis, while the quarter on quarter figure contracted more than expected, to collectively add to the continued Euro weakness story.

?? USD - With everything going on with Brexit and the situation in Europe, the Dollar was slightly weaker this morning as dealers took profits following the record 2018 levels hit this week. Looking ahead, later on, today a speech from Federal Reserve Chairman Jerome Powell will most likely seek to calm concerns about the Fed hiking rates too fast. As part of this speech, Powell will hope to point to data out today for which expectations are that US CPI should move higher to 2.4% YoY, while core inflation is set to stay at 2.2%. Given that prices are skewed to the upside, while wages are set to rise, the numbers could reinforce the Fed’s approach towards gradual and ongoing tightening which has meant for a continued strong Dollar throughout H218.

 

Summary:
GBP: Sterling volatility at its highest levels since 2017 election following the agreement of a draft Brexit deal;
EUR: Italians remain stubborn in their approach to Budget negotiations in the face of billions of Euros worth of fines;
USD: Data and Fed likely to support gradual and ongoing tightening.

 

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