Brexit talks unlikely to yield a breakthrough
The fifth round of Brexit negotiations began yesterday with the two sides as far apart as ever on the major issues. What had started as the expectation of a move towards stage two was replaced by the possibility of a breakthrough and this has now become the remote chance of a breakthrough.
There can be little doubt that both sides are heading towards a hard Brexit which in the long run will benefit neither side but will have the most severe short-term consequences for the U.K.
The economy is faltering badly, the weakness of the pound is importing inflation, which will reach at least 3.2% when October’s data is released next week, business investment is very weak, and the consumer is starting to show concern just as the busiest period of the year is starting for retailers.
The historic rate cut that took place last week has backfired spectacularly which cannot have come as a complete shock to the MPC who had to be at least aware that a “Dovish hike” would not promote currency strength but, probably, have the opposite effect.
Unless there is a breakthrough in Brexit talks the pound is in for a long hard winter!
Dollar held back by Tax Bill
The inability of Congress to get agreement on fiscal reform has held the dollar back from consolidating its monetary policy advantage. This is a temporary setback although the longer the wrangling goes on the worse it will get for the President’s plans, especially his economic stimulus package which is still yet to see the light of day.
The dollar index is treading water unable to break significantly above the 95.00 level but gaining support at ever higher levels. It is building a head of steam preparing to break out of its narrow 94.50/95.00 range.
President Trump’s visit to China has been labelled a success mainly as he has managed to understand the Presidential duty to be deferential when visiting one of the few genuine global equals the U.S. has. Trump has managed to just about squeeze sufficient support for nuclear non-proliferation on the Korean peninsula to satisfy his hawkish expectations, but that situation remains tense at best.
At the end of a quiet week for macroeconomic data, the market is awaiting the confirmation of Jerome Powell as the new Chairman of the Federal Reserve. It is generally agreed that since the President would have found it difficult to reappoint Janet Yellen having been critical of her in his campaign that Powell is the best man for the job.
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Dollar rise set to falter on profit taking
The rise in the dollar index since early September is starting to falter and could start to reverse as several funds that are long start to take profit towards the end of the month as they close their books on the year. The index is still well below its 21-month SMA as the dollar’s fall on disappointment with Trump not delivering his campaign promises has not been fully reversed.
The outlook for the dollar remains positive as monetary policy and interest rate differentials provide a healthy backdrop. A more data driven FOMC is likely to prevail under Jerome Powell and he is sure to listen, initially at least, to those members who are concerned about both the source and strength of inflationary pressures.
With the Central banks in the rest of the developed world still not displaying a tightening bias the dollar is set to hold a distinct advantage. The BoJ and SNB are both still displaying dovish tendencies with the SNB President remarking yesterday that despite ultra-easy monetary policy, the Swiss Franc remains a major global currency due in no small part to the strength of the Swiss banks.
