Frantic efforts to prepare a draft for Summit

The pound rose to its highest level for almost six months yesterday as an outbreak of optimism descended upon the Brexit negotiation in Brussels. Even the normally reticent EU’s Chief Negotiator Michel Barnier conceded that a deal was possible this week.

Overnight, investors took profit on short-term long positions as they expressed mild disappointment that there was no announcement as talks broke up for the day at around midnight.

With the EU Heads of Government Summit beginning tomorrow, there, a story emerged that Angela Merkel believes that even if a deal if agreed it will be virtually impossible for the “clean break” to take place by 31st October. It may be that Boris Johnson’s promise to leave by 31st October may be held up by such a technicality but that will probably satisfy his supporters provided the delay is temporary.

There are also concerns that the Irish Democratic Unionists may not support the proposals for the Irish border. However, it is likely that since Johnson’s Government is already in a minority, that their support is no longer crucial in propping it up as it was during Theresa May’s tenure.

So, the UK stands on the brink of leaving the EU on or close to October 31st, but there is another massive hurdle for Johnson to climb. The mood of Parliament towardsanydeal. Johnson remains very much in the hands of what MPs think of it. If the Opposition Parties believe thatany dealshould be put to the people, a referendum could still be called for. However, that would be a dangerous strategy for Jeremy Corbyn to play since should an acceptable deal be stymied by political “shenanigans” it would a massive risk with an election still certain this year or at least early next.

The pound made a high of 1.2801 versus the dollar yesterday, closing at 1.2784. Overnight it has slipped back to a low of 1.2755 but remains well supported.

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Trade talks side-tracked

Ongoing trade talks between Washington and Beijing, which appeared to be making reasonable progress, have been side-tracked by a growing dispute over the U.S. Administration’s support of pro-democracy demonstrators in Hong Kong.

The demonstrations, which have been a feature of Hong Kong for several months, are seen by China as a domestic issue. Since the UK “handed back” Hong Kong to China more than twenty years ago, there has been growing mistrust of Beijing, particularly from the younger generation.

President Trump’s foreign policy hardly needs another problem to deal with considering the “too little too late” response to the Turkish “invasion” of Northern Syria and the ongoing issue of Iran.

The dollar is reacting in a wider sense to geopolitical matters providing it with a degree of short-term volatility. In the longer-term, the focus is on monetary policy and how the Fed sees short-term rates evolving. Regional Fed Presidents Bostik, George and Daly all spoke at various events yesterday but their message on rates remains unclear. This could indicate a possible split in the united front they were displaying in the run-up to previous FOMC meetings.

Short term the dollar index remains in a 99.20/98.20 range with constituent’s drivers playing a major role. Yesterday, the index fell to 98.20, closing at 98.30. Any confirmation of Brexit deal will likely be supportive for both the pound and euro which will see the index test the bottom of its support.

Data brings renewed hope

Yesterday’s release of the economic report from the highly influential ZEW Institute for both Germany and the wider Eurozone showed what had been hoped by analysts from some months, namely that the Eurozone economy, driven by Germany, could be bottoming out.

With a recession almost certain to be declared when Q3 GDP data is published in the coming weeks, the market remains sceptical. The feeling is still that “major surgery” is necessary if the “patient” is to make anything approaching a full recovery from its current malaise.

ZEW expectations data for German showed a fall from -22.5 to -22.8, but as bad as this is it was not as bad as commentators had feared. For the Eurozone, it was a similar story a fall from -22.4 to -23.5, but this was significantly better than the -33 that analysts had feared.

While the data is hardly encouraging, every great journey takes place with a first step in the right direction. With winter coming and tensions rising in the Middle East, any further shock to oil supply affecting prices could see the data head south very quickly.

Once Brexit is out of the way and the effect of the withdrawal of the UK’s budgetary contribution is fully measured, the EU will have some serious soul-searching to do to decide on its future direction with the replacements for Jean-Claude Juncker and Mario Draghi, Ursula von der Leyen and Christine Lagarde likely to be at the forefront of political and economic reform.

Yesterday, the euro traded between 1.1044 and 1.0990, closing at 1.1034.