Davis slips a major concession into conversation

It has been a feature of Brexit negotiations that the market seems to slip into an optimistic frame of mind whenever there is a lull in public pronouncements concerning the UK’s departure from the EU.

It has been the case over the past few weeks, and traders have studiously avoided the potential problems arising from the impasse over the Irish Border and concentrated on the positive noises being made over the transition deal.

Yesterday, David Davis the UK Brexit Minister announced that he would be satisfied with a shorted transition period. It is well known that Brussels prefers a 21-month transition with the UK finally departing the EU on 31st December 2020.

Davis made the announcement as low key as possible in order not to disturb the equilibrium that has started to surround Brexit. It is in contrast to the comments of his boss, Prime Minister, Theresa May who recently said that she would accept a longer transition as it would favour UK business and its ability to adapt to new rules and procedures.

Sterling remains well supported for now, but the bulls are having to try harder and harder to remain positive and any negativity engendered next week which will then call into question the possibility of a May rate hike and the pound could face a quick and decisive fall.

Trump running out of allies

It seems that another member of President Trump’s Cabinet faces removal today as National Security Advisor HR. McMaster could be leaving his post. This rumour has recently been denied by the White House but there is rarely smoke without fire in Trump’s White House.

It is hard to imagine the President’s thinking since it appears almost megalomaniacal for him to be continually replacing senior advisors and ministers and he seems intent on living up to parodies of his actions.

Next week we can return to more easily understood monetary policy decisions, or maybe not. It is odd to see a Central bank so intent on hiking rates that even the man in charge, renowned for an analytical and pragmatic approach gets caught up. A rate hike by the FOMC next week flies in the face of recent employment and inflation data both of which have been mixed at best.

Proactivity and pre-emptive action are one thing, but this hike falls into the hard to explain category.

The dollar is hemmed in to a tight range at lower levels which suits the administration despite new advisor Larry Kudlow calling for a “slightly stronger” dollar. Kudlow is well known from his role on CNBC as being outspoken in his views, so it will be interesting to see if he is expected to rein himself in or given his head by the President.

“Super Mario” the perfect Central banker.

Mario Draghi, the President of the European Central Banker may only get much of the praise he deserves once he has left office in November next year.

Draghi has given the ECB an unquantifiable gift during the tenure in Frankfurt; the gift of credibility. His predecessors, Wim Duisenberg and Jean-Claude Trichet never appeared comfortable or fully understanding of the magnitude of the role during their tenure.They were often being pulled “this way and that” by individual Eurozone member’s needs and requirements.

Draghi has proved to be his own man, fiercely advocating monetary policy that creates a “level playing field” for all nineteen economies under his influence.

There has been pressure, particularly from Germany for accommodative policies to be removed and a series of rate hikes to be embarked upon to normalize interest rates. Sr. Draghi understands, better than any academic’s model, that his policies affect real people with real lives that exist on more than an economist’s spreadsheet.

The term “normalization” is becoming outmoded since it is hard to say just what a sensible level of interest rates will be that encourages growth across the entire region yet controls inflation at close to 2%. The same is true of employment. It is impossible to say what the Eurozone-wide rate of unemployment is that relates to the concept of full employment

 

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