Sufficient Progress has been made!

Resolution of Border must precede Stage Two

The intransigence of the EU Brexit negotiators has been perfectly illustrated by their insistence that the matter of the border between Northern Ireland and the Republic be agreed before talks move on to stage two.

It now looks like there will be an agreement over this difficult issue today, Mrs May has flown to Brussels this morning following overnight talks with the DUP. However, as the negotiation of the future relationship between the U.K. and EU begins it is becoming more evident that Brussels intends to give away very little if anything as a sign to other wavering members that out means out.

The pound rallied strongly overnight continuing gains made late yesterday as the currency reacts solely to this single event. It has reached 1.3519 overnight versus the dollar having closed at 1.3485 yesterday while against the Euro, it is within sight of long term resistance. It has made a high of 1.1494 this morning following strong gains yesterday when it made a high of 1.1450. There is strong resistance at 1.1550 which was the level on June 8th when the General Election took place. If that level is breached, then purely from a technical perspective, the high of 1.2010 on April 18th, when the election was announced, would become a target.

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A Long Road Remains

What has been agreed overnight is still unclear although Mrs May has confirmed that the Good Friday Agreement will be upheld and there will be no “hard Border” between the Republic and the North in Ireland.

Next week’s EU Heads of Government summit will ratify the comment this morning form Jean-Claude Juncker the President of the EU commission that sufficient progress has been made

This is just the end of what should have been the preamble to the primary discussions. The exuberance being displayed by the performance of the pound betrays the fact that Brussels has shown itself to have little interest providing any support to any nation which chooses to leave the EU.

We should not expect a new “spirit of cooperation” between the two sides as the negotiations restart in the New Year. It is still going to be tough to reach an agreement before the official leaving date of March 29, 2019 and it is very likely that the EU negotiators will use the same tactic of placing before the U.K several questions that need to be resolved and they will probably be as tough as the ones in the preliminary discussions. The pound will continue to be buffeted by every twist and turn in the process.

Dollar struggles as Employment report looms

In a similar fashion to the way Sterling is driven by a single factor, the dollar is reacting solely to the path of interest rates and the differential in rates between itself and its G7 partners. The dollar index has risen steadily this week as expectation has grown that today’s employment report will be sufficient to provide confirmation of next week’s expected rate hike.

However, and we have seen this time and again, it is what happens following the hike that should be exercising trader’s thoughts.

The Senate panel have approved Jerome Powell as the new Fed Chair and that will be ratified by a vote in Congress in the coming weeks, Mr Powell will take over when Janet Yellen’s term expires on February 3rd. Even as a lame duck, Mrs Yellen will probably give strong advance guidance of the thoughts of the FOMC going forward and these will be dominated by the expected source of any future inflationary pressures.

Today’s employment report will probably have a headline non-farm payroll number close to +200k new jobs with the unemployment rate unchanged at 4.1% which should, but isn’t, raise concerns over inflation. The Hourly earnings figure of 2.5% will be sufficient to confirm the rate hike but as CPI remains benign, any future change in monetary policy will remain in doubt.