Reality of a hard Brexit as Brussels remains firm

The prospects for a negotiated settlement of the issues facing the UK and EU over the UK’s departure for the EU have taken a serious nosedive this week. The reality of the departure from the customs union and the single market means that the possibility of “frictionless trade” is now non-existent. Brussels has chosen to make the Irish border question the front-line of the negotiations aware that the UK cannot allow for the province to be “hived off”

Brussels contention that the only way for a soft border to exist between Ireland and Northern Ireland is for the North to remain within the customs union is totally unworkable for the rest of the U.K. as it brings the integrity of the UK into question.

The pound has fallen as the reality of the situation becomes clear and Theresa May the UK Prime Minister makes a major speech today outlining the British proposals for Brexit. Sooner or later, the reality is going to have to be accepted that without a major climbdown a hard Brexit is becoming inevitable. The agreement of a transition period is far from clear as the EU will want clarity about what is being transitioned towards.

Italian election one of the Euro headwinds

The Euro is starting to react negatively to the prospects for Brexit as the disruption to business and industry is likely to be less severe that to the UK but still serious. The UK is and will remains a major market for EU trade and the disruption particularly during any transition period is likely to be severe.

The most pressing issue for Brussels right now is the outcome of the Italian election. The worst-case scenario is for another Brexit style departure to be threatened although the situation is far from that right now. Concessions may be needed particularly around refugees and migrants as Italy comes close to becoming totally swamped.

The major coalition partners likely to hold sway in the new Government are demanding an apology from Brussels for the destruction of the Italian economy although any such acknowledgement of blame is unlikely in the extreme to be forthcoming. The issue of a new, purely domestic currency is being discussed although it is hard to see any benefit other than a symbolic one to the Italian people.

The Euro is under mild selling pressure but there is very strong support at 1.2080 which is unlikely for now to be seriously tested

Employment report to be single most important data release of Q1.

The delay in the release of the U.S. employment report for February will add to the sense of expectation surrounding the wage inflation data. It could be argued that the prospects for monetary policy for the whole year could hinge upon a continuation of the rise in the rate of income growth seen in January. Wage inflation reached 3% and this could have been a one-off anomaly or the start of the pickup in activity that will lead to inflation across the entire economy.

In addition to this speculation, there is the notoriously fickle nature of the entire report which if often little more than the work of the imagination of the employees of the Bureau of National Statistics. Adjustments of 25% or more are not uncommon, so it seems odd to base the entire country’s monetary policy on such whims.

Jay Powell has portrayed an upbeat message for the economy, but it remains to be seen if he is prepared to be sufficiently proactive to satisfy those calling for four rate hikes in 2018. Powell’s first testimony before congress provided optimism that he going to carry on where Janet Yellen left off although his more studied approach will be welcome.


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