Likely to follow Yellen’s lead, initially

In a prepared testimony for Congress which was delivered yesterday, Fed Chair designate., Jerome Powell, followed the course set by his predecessor, Janet Yellen and confirmed his view that interest rates would rise gradually, and the size of the Fed’s balance sheet would shrink in the coming months. His words seem to confirm a rate hike next month, but the outlook is clouded by both the benign quality of inflation together with Powell’s probable “wait and see” attitude.

The dollar index spiked lower then rallied back to close virtually unchanged following Powell’s remarks. Over the coming weeks Powell will make a series of speeches that will illustrate more clearly his vision for monetary policy going forward and the dollar is likely to react to every nuance of his words.

The dollar index is supported at the year’s low of 91.05 reached in September but any rally above 95.00 is unlikely to lead to further gains as buyers of the common currency will intervene as that level roughly equals the 1.1660 support.

Elsewhere, the dollar is steady at 111.15 versus the JPY as global tension falls and risk appetite improves. One cloud on the horizon are rumours that Pyongyang is preparing another missile test as soon as this week.

Brexit reaching critical point

The months of political posturing and veiled and unveiled threats over Brexit seem to be coming to a head with the approach of the EU Heads of Government summit set to take place on December 14/15. A deadline has been put in place of the 4th December for the U.K. to commit to its proposals for the three prime issues that the EU expects to be dealt with before the talks can move on to stage two where the future relationship will be discussed.

The pound remains in narrow ranges against both the dollar and euro. Versus the dollar it has ranged between 1.3385 and 1.3070 while as the common currency has reacted to positive news over the German constitutional crisis, Sterling has fallen to reach 1.1150. As the new month approaches, the euro is likely to gain a little more as the usual month end buyers emerge.

There has been little revealed about the state of the most recent round of talks between Donald Tusk and Theresa May other than Tusk commenting that there is still work to be done. The issue of the Irish border now seems to be the most vexing as a catch-22 situation is developing where the Republic want a “soft” or “open” border and the Unionist North, who are supporting May’s minority Government, support a tough stance.

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Germany set to reassert itself

If any proof were needed of which country is the dominant force in EU political and economic development, the past few weeks have provided all the evidence that was needed. As Angela Merkel has busied herself with domestic matters, there has been an almost palpable vacuum in Brussels with prevarication and bluster, particularly over Brexit, replacing cogent argument.

The Euro has been bolstered by a solution to the German constitutional issue as its wider ramifications have been appreciated. It is threatening to break the 1.2000 level although resistance at 1.1980 has so far remained firm. The years high is at 1.2093, reached in September but the markets understanding of ECB monetary policy has been reinforced since then and the single currency is looking a little heavy at these levels.

Versus Startling it is driven solely by Brexit discussions. With a fresh ultimatum of 4th December for the EU to receive proposals over the “three issues” delivered pressure will build only to be released when it has passed no matter what conclusion is reached. It is a common belief that Sterling will fall if a hard Brexit becomes more likely although such an outcome could be equally negative for the single currency.

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