Hammond to deliver spending plans

Today, Philip Hammond the Chancellor of the Exchequer will deliver his final full year budget to Parliament before the U.K. formally leaves the European Union in March 2019. He is expected to clarify the amount being offered to the EU as the U.K.’s contribution to the budget over the next five years.

It seems that there has been a breakthrough from Theresa May who has persuaded the more hawkish members of her Cabinet that an offer of forty million euros will be sufficient to gain agreement from Brussels to move to stage two of the talks. If this happens it should bring some relief to the pound although given experience, there is still room for bad news.

The sense of expectation is building again as the announcement of the agreement or otherwise to move to stage two will be made at the EU Heads of Government summit on December 14/15.

A relief rally, or a collapse driven by the likelihood of a no-deal scenario, is the stark choice facing markets that will start to position themselves according to their expectation in the coming days and weeks.

The pound has been drifting this week as the dollar and common currency face their own monetary policy and political headwinds.

Merkel facing tough choice

German Chancellor Angela Merkel is facing a tough decision over the next few days. Germany has been without a formal Government since the election on September 24th which failed to produce a conclusive result and has created a vacuum which has been made worse by the collapse of talks about forming a coalition Government between Merkel’s CDU/CSU alliance, the Greens and the Free Democrats (FDP). The FDP have left the talks saying they cannot work with the other two parties. There is a strong feeling that Merkel has gone too far with her pro-immigration “we can do it” rhetoric.

There was a clear move to the right in the previous election with the hard right AfD winning almost 14% of the vote. The fear is a stronger showing in any new election which could pitch them into a share of power. This would have ramifications far beyond Germany’s borders with the EU having managed to survive concerns over the right in France and the Netherlands facing a rise in nationalism which could threaten the very existence of the bloc.

There is a sense of calm across the markets as traders await Mrs. Merkel’s decision.  The uncertainty of fresh elections will push the Euro lower, possibly testing the major support at 1.1620.

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Dollar drifting on sea of doubt

The dollar index has recovered a little from its recent lows but remains capped by uncertainty over the next move in U.S. monetary policy.

There is a growing divide which is being voiced by a few members of the FOMC over the need for both a hike next month and a more hawkish stance over inflation. CPI has been weak over the past few months and the return of monetary policy to normal is likely to have a further dampening effect. Economists are struggling with the idea that the amount of accommodation that has been seen over the past few years is not having a more dramatic effect on inflation and  the departure from the Fed Chair and indeed the FOMC of Janet Yellen is giving rise to a change in attitude.

Advance guidance and pre-emptive action are likely to be replaced by a more pragmatic approach where actions will be data dependent. This will provide traders with a more solid base on which to judge the coming actions of the FOMC and will tally more with the expectations of Wall Street.

The dollar index, which reached a low of 93.40 has recovered a little, reaching 94.16 but there is no clear path until monetary policy is more certain.

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