Brussels to ask for clarification over framework for stage two

Theresa May was in Brussels last night for dinner with the remaining twenty seven Heads of Government as the move to stage two of Brexit negotiations was ratified. The statement from the “twenty-seven” that will be released today calls upon the U.K. to provide “further clarity on its position on the framework for the future relationship” before talks about it can properly start in March next year.  

It is typical that almost as soon as the ink is dry on the agreement to move to stage two, Brussels employs similar tactics as in the previous negotiations by expecting the U.K. to provide its own proposals leaving the EU negotiators clear to be reactive.

Talks will move to the framework of the transition period before stage two talks commence, most likely in March, but wholly dependent upon the UK. providing its proposals.

There has been surprise expressed by those at the summit that Mrs May’s Cabinet has not yet formulated plans for what it expects form a trade deal and the EU is not about to show its hand early but making its own views known. Brexit is going to be a considerable driver of all aspects of life in Britain for the foreseeable future and the Government needs to start to be a little more proactive as talks start to demand decisions that will shape the its economic future.

Central Banks add to confusion

It is obvious that the economic models used by G7 Central Banks have been thrown off by the way the global economy has recovered from the global economic crisis. Whilst inflation in the U.K. is close to rampant and blamed both spuriously and conveniently by the MPC on the fall of the pound since the Brexit referendum, elsewhere it is less of an issue.

In the U.S., it is noticeable that despite the unemployment rate breaching the 5% level, which is considered full employment, some time ago wage inflation has hardly grown at all. With the unemployment rate closer now to 4% it concerns the FOMC that core inflation fell from 1.8% to 1.7% in November. The outlook for rate in the U.S. remains at three hikes in 2018 as confirmed by the comments at this week’s FOMC meeting confounding market hopes for a move to a four-hike bias.

At its meeting yesterday, the ECB raised its outlook for growth and inflation yet also confirmed that “accommodation would stay in place “as long as necessary””. This obviously meets with the approval of the weaker Eurozone nations yet draws anxious glances from the Bundesbank whose models show inflation starting to pick up again 2018 although given what has happened over the past ten years those models may need recalibration.

Market will lack drivers until year end

In the past, FX markets would have seen a lack of liquidity which occasionally drove big moves in December as traders closed their books from the year. There always seemed to be some large corporate customer who desperately needed to buy a large amount of currency to settle an invoice that “simply had to be settled” before year end.  

Next week, the last before Christmas will hardly see any drop off in liquidity at all thanks to the way the market has changed in the past ten to fifteen years, there will still be the seasonal lack of interest, but liquidity will be fine as it is primarily driven by just six banks who, in one way or another, see 90% of all traffic.

As Bank traders turn their attention to what will be the main themes of H1 ‘18, the retail market continues to be dominated by ‘bots, algo’s and technical formations on charts. Scalpers will see opportunity to trade die out first as daily ranges fade. Then algo traders will be affected by the same problem as they don’t have data to run with. Finally, charts will start to flatline as activity dries up completely. At that point it is best to turn off the PC, leave the basement and join the festivities.

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