Dollar clinging to recent gains

The dollar is clinging on to recent gains buoyed by the hope that hawkish Stanford University Economist John Taylor will become the next Chairman of the Federal Reserve. Taylor advocates a rules based system to determine the path of interest rates that takes away the more subjective approach introduced by Ben Bernanke when he was Chairman. The only other remaining candidate is existing Fed Governor Jerome Powell. Current Fed Chair Janet Yellen was interviewed by Trump last week but now appears to be out of the running. Yellen will be the only “one term” Chairman the Fed has seen other than G. William Miller who left the post in 1978 to become Treasury Secretary.

President Trump visited Capitol Hill yesterday and managed, yet again, to become embroiled in a spat with, not one but two, Republican Senators. Bob Corker accused the President of “telling untruths” and Jeff Flake announced his decision to stand down citing reckless, outrageous and undignified behaviour” at the top of the US government as being dangerous to democracy.

The President responded in typically robust style dismissing both as unelectable. His tirade will have done further damage to the prospect of getting his tax reform bill passed despite its basically logical proposals.

U.K. Growth suffering Brexit woes

Today, the U.K. will release the preliminary report on GDP growth for the third quarter of the year. It is likely to show that the economy grew at just 0.3% quarter on quarter, the same amount by which it grew in Q2. This will mark a fall in annual growth from 1.5% to 1.4%.

There is no question of the major headwind facing the U.K. economy. Brexit and the uncertainty the Government’s negotiating position is creating is having a profound effect on the investment intentions of U.K. businesses and the spending habits of individuals. The continual rhetoric and posturing from both sides is proving impossible to countenance and this has led to SME’s in particular trying to maintain rather than increase market share.

Economic data, apart from inflation, has pointed to no change in interest rates for some time yet a poll of analysts conducted by Reuters yesterday still found a majority favouring a hike next week.

It is hard to believe that if growth is as weak as the numbers will probably show today that the MPC will vote to hike rates. Inflation continues to be a problem, but the rules have changed in that regard and it appears that the Government, without officially commenting, has relaxed the necessity for policy to bring inflation back to 2%. The pound is clinging to hopes of a rate hike, but that support is likely to be short-lived as once the decision is
made any support will evaporate.

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Brexit confusion continues to reign

Michel Barnier, the Chief EU Brexit Negotiator, a man, according to his countryman, Emmanuel Macron, who has the support of the entire 27 country EU, said yesterday that the best the UK can hope for from the second stage of negotiations is a trade deal like that of Canada. This is a deal already ruled out by Theresa May in her Florence speech at the end of last month. Barnier also said, in a speech that was more hard-line than has been his posture recently that it could take many years for a deal to be completed and that during any transition the UK wouldn’t be able to negotiate other trade arrangements.

This is the harsh reality of the cryptic comments made by Donald Tusk the President of the European Council following last week’s summit. In what looks to be a coordinated pair of speeches, Tusk also said that it wasn’t too late for Brexit to be halted.

The U.K. continues to sleepwalk into a hard Brexit, but they are seemingly being guided in that direction by Tusk, Juncker and Barnier.

With GDP data, the MPC meeting and Brexit as its drivers the pound is likely to see continued volatility!

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