Brexit to take a back-seat

Following last week’s confirmation of the agreement of Brussels to move to stage two in Brexit negotiations, the U.K.’s proposed departure from the EU will take a back-seat for a few months as internal discussions start. The EU Commission will be free to discuss the other main issue that faces a more integrated Europe; that of the rise in populism and right-wing views.

German Chancellor Angela Merkel has suffered at the polls following her open-door policy to migrants and refugees despite the improvements in the economy that has led to lower unemployment. There has still been no agreement over a new coalition Government despite the SPD agreeing to sit down to talks with Mrs Merkel.

In Vienna, the announcement of a new coalition Government will concern Brussels as it contains a far-right party who will be returning to Government for the first time in more than fifty years.

The common currency which has seen a relatively calm second half to 2017 will likely suffer if there is a rise in anti-EU sentiment particularly in the forthcoming Italian election. There is already discussion taking place among opposition parties about the issuance of a currency to replace the Euro for domestic transactions.

But not in the U.K.

Theresa may the British Prime Minister will move this week to start preliminary talks with her Cabinet over the trade deal the U.K. will expect when it leaves the EU in March 2019. The most pressing issue to be agreed is the proposed length of the transition period during which the U.K. will demand to be able to negotiate trade agreements with non-EU countries.

There was surprise in Brussels when Mrs May was asked about the U.K.’s plans for stage two when they were informed that no discussion had yet taken place. There is little doubt that Brussels will be clear about its expectations for a deal and that will revolve around giving away as few concessions as possible to deter any other member countries from travelling down the same path as the U.K.

From a British perspective, the congratulations Mrs May received from Brussels last week upon completion of stage one of the talks will have been a little ironic given that the U.K. clearly acquiesced to every demand made by Brussels. How stage two will be managed remains to be seen although it is likely that Mrs May will leave the early negotiations, which won’t start until next March, to her Brexit team headed by David Davis.

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Dollar to remain hemmed in

The greenback is likely to continue to trade in relatively narrow ranges as successive data releases point to an upturn in activity, yet inflation remains weak. This week will see the release of the “final cut” of the GDP data for the third quarter. The previous 3.3% read is unlikely to be improved upon, but when added to jobs growth averaging more than 200k per month and an unemployment rate well below the full employment level of 5%, an upturn in inflation should be expected.

During the recovery from the global recession, the Fed has now hiked rates four times, three in the past twelve months as continued “cheap money” supply has driven asset prices higher and close to bubble levels. Inflation remains benign. Until there is a clear indication of both source and direction for inflation, new Fed. Chair, Jerome Powell, is unlikely to support any further hikes. The three-hike strategy for 2018 discussed by outgoing Fed. Chair, Janet Yellen remains in place but is unlikely to be tightened any further.

The dollar index still sees strong resistance at 94.00. With support at 92.50 it will take a major event to move it prior to the next FOMC meeting  which will take place on 31st January.

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