Dollar reacting to likely pick’s outlook

There are three likely candidates remaining to be Chairman of the Federal Reserve in February.

The current incumbent, Janet Yellen has done a stable if unspectacular job over her tenor in the job balancing the need for a normalization of monetary policy with the need to build a solid basis for low-inflation future growth. It is the nature of the American psyche that changes need to be seen in order to continually improve. The previous three Fed Chairs were all re-appointed by the President, given the right to leave at a time of their own choosing.

The second candidate is John Taylor an economist at Stanford University and the architect of his own method of monetary policy which is a simple, rules based method under which if applied today the Fed Funds rate would be appreciably higher. Were Taylor to be appointed change would still be gradual as he would only be one vote as decisions have become consensual since the time of Ben Bernanke.

The final candidate is Jerome Powell. He is considered by many to be the favourite and contrary to Trump’s usual style is considered a safe pair of hands. While Yellen is considered the most dovish of the candidates, Powell is the most sympathetic to her inclusive style of decision making

May remains optimistic despite recent history

No matter how I read Donald Tusk’s tweet on Friday following the EU summit I am unable to glean as much optimism as Theresa May. It seems that nothing has changed as far as the EU is concerned and they will await firm proposals from the U.K. before agreeing the start of stage two of the talks where the U.K. gets to negotiate its future relationship with the EU.

There is also one further major stumbling block. That is just what those negotiations will mean. The EU has already said that totally unfettered access which is given to EU member states won’t be given to an outsider.  So just how the relationship will look going forward is open to interpretation.

One further cloud on Mrs May’s horizon is the possibility of a revolt in Parliament where MPs vote to give themselves to have a say on the final deal (if indeed there is one).

When speaking to EU citizens (rather than politicians) it is interesting to hear their comments. There is a feeling that although there is little sympathy for the U.K. in that they have decided to leave so need to live with their decision, they are to be praised for the fact that they see Brexit as a wakeup call to Brussels. It remains to be seen what the post-Brexit landscape will look like but other members are hopeful that the overbearing nature of Brussels will be loosened somewhat.

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Monetary policy decisions to set the tone

The Governing council of the ECB meets this week and will leave interest rates unchanged as Mario Draghi continues to exert what is seen by France and Germany as excessive caution over the state of the Eurozone economy. The ECB is without doubt the most dovish of the G7 Central Banks at the moment.

This contrasts with the U.K. where monetary policy is in tatters over Brexit and the weakness of the currency. Conventional wisdom says it would be madness to hike rates in such an environment. If they were to hike and it was to either be a one-off move or need to be reversed if Brexit talks to break down completely the effect on the currency would be severe.

At the hawkish end of the Monetary Policy spectrum is the Fed who are likely to raise rates at their December meeting despite concerns of certain members over both the level of inflation and the prospects for wage growth.

Trumps pick as Fed Chair will go a long way to deciding future Fed policy but economic conditions, starting with this week’s preliminary Q3 GDP reading will contribute to deciding how hawkish the Fed can be.

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