Back to the drawing board

There will be a certain amount of “we told you so” at today’s Cabinet meeting.

When progress over Brexit is reviewed, Mrs May will come under renewed pressure to abandon Chequers and go back to the drawing board over her proposals for the future relationship between the UK and the EU.

A plan that had received wholesale condemnation from almost every quarter of the political spectrum was finally consigned to the dustbin by EU officials and Heads of State who had been mumbling for weeks about holes in the proposals.

Upon her return from Austria, Mrs May hit back at Brussels claiming that the intransigent approach of Messrs Barnier and Juncker is going to have to change if there is going to be anything other than a hard or no-deal Brexit next March. As has become the hallmark of these negotiations, May’s words were repeated back to her almost verbatim.

Sterling, predictably, fell precipitously following the virtual collapse of negotiations and is now firmly on the backfoot. The only surprise was that it managed to reach a high of 1.3299 last week despite the clear doubts than any agreement could be reached based upon the two sides current positions.

Sterling fell to a low of 1.3054 on Friday and has remained close to its lows this morning in Asian trade.

Apart from today’s Cabinet meeting, Mrs May is sure to receive a rough ride from Parliament. Any positivity gained from last week’s stronger than expected economic data has now faded and with a particularly light data load this week, market focus will be clearly on Brexit.

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Dollar higher as China cancels trade talks

As had been widely expected China announced overnight that their delegation will not be attending the latest round of talks on trade that were scheduled to take place this week. Beijing has voiced an opinion recently that talks are a “waste of time” while the U.S. administration continues to place tariffs on an ever-growing list of Chinese exports. The latest cancellation is also in retaliation over America’s sanction of China over its purchase of military aircraft from Russia. Beijing clearly feels that it will not be dictated to by Washington about defence spending despite the sanctions imposed on Moscow over its supposed meddling in U.S internal affairs.

The feeling of positivity engendered by the release of a report stating that the effect on global trade of the ongoing spat between the U.S. and China is not as great as had been feared has gone. It has been replaced by fears of an escalation in which Moscow is now getting involved as more than an interested spectator.

The dollar index halted its recent side on Friday reaching a high of 94.33 and closing at 94.20.

This week the FOMC meets and for the first time in a while, there is doubt about the outcome.

The Fed is expected to hike twice more this year and with opportunities running out the first of those hikes could be seen this Wednesday. Jerome Powell, the Fed. Chairman will hold a press conference following the meeting at which his predictions for the economy will be closely monitored for an even more hawkish outlook for 2019.

Analysts predict fall for Euro from “disruptive Brexit”

There have been several factors affecting the euro so far in 2018, the majority of which have been reactive to the dollar’s drivers.

Analysts are beginning to turn their attention to the effect of Brexit and in particular a no-deal Brexit on the single currency. With the deadline for agreement rapidly approaching it seems that the Eurozone cannot afford to be as sanguine about the departure from the EU as had been the case since negotiations began.

The economic effect on the region will be larger than expected and the effect on the remaining nations of the “hole” in the budget could cause some serious wrangling. It is trade that will exercise the individual nations the most however. German manufacturers are already voicing concerns and that is likely to spread further.

Free movement of people will be ended which will affect several of the smaller nations of the EU whose natives have been finding work in the UK.

As negotiations continue to falter it will be the single currency that could start to suffer. One effect of any significant effect on the Eurozone economy could be a delay in any move towards the normalization of interest rates by the ECB.

The euro made a high of 1.1803 versus the dollar on Friday but closed lower on the day at 1.1749 as a combination of Brexit disappointment and dollar strength combined to exert pressure. It has exceeded Friday’s close and has recorded a low of 1.1737 so far this morning.