Brexit talks bearing fruit?

After a week of Brexit rumour and counter-rumour, Sterling broke higher versus the dollar yesterday as traders accepted that a deal is close. It reached a high of 1.3151 and has continued to strengthen marginally overnight.

Any deal must be placed before Parliament for ratification and there are several hurdles to its passage.

Around forty rebellious Government MP’s could disrupt the bill if it is considered to be a compromise which leads to a “half-in half out” Brexit. The main opposition Party will vote against the bill no matter how it is worded, the DUP, which currently supports the minority Government, have not been fully appraised and have said they will vote against if there is any change to the role of Northern Ireland within the UK. Finally, SNP MP’s will do their best to disrupt Brexit unless they are given access to similar terms that are proposed for Northern Ireland.

The pound’s rally could be short-lived if there is no announcement imminently, but Brexit Minister Dominic Raab is expected to address the House of Commons this week on Brexit progress. Today’s Prime Minister’s questions in the House of Commons is certain to be dominated by Brexit.

Today sees several data releases that will determine the level of ongoing activity in the UK economy. Industrial, manufacturing, and construction output are all due for release.

Manufacturing and Industrial Production are expected to have improved from a particularly poor August while construction is expected to remain weak. The 3M change in GDP is also expected and that is likely to show a constant 0.6% growth between June and August versus between March and May.

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Euro fall continues as Italian defiance threatens to spread

After Italy, the next most radical Government in the Eurozone is that of Greece. Although the Government of Alexis Tsipras has so far “toed the line”, social unrest in Greece never seems far beneath the surface. The degree of hardships that Greeks have suffered since the near collapse of its economy make Italy’s issues pale into insignificance.

It often appears that Tsipras is simply waiting his moment to align Greece more closely with Moscow although he is aware not to “bite the hand that feeds him”. Russian influence in the eastern Mediterranean and Aegean seas is growing and Greece is seen as an ally by Vladimir Putin.

Any social upheaval that emanates from possible issues between Rome and Brussels will be eagerly exploited.

Yesterday the single currency fell to a low of 1.1430 but recovered to end the day unchanged at 1.1492.

Germany’s most populous State, Bavaria, goes to the polls on Sunday in a vote which is being seen as a test of establishment versus non-establishment policies in the entire country. The performance of Angela Merkel’s coalition partner CSU Party is going to be closely scrutinized. Any wave of support for the nationalist AFD could bring a major upheaval in Berlin.

The result coupled with the timing of the submission of the Italian Budget to Brussels will bring additional volatility to the single currency.

The dollar rally continues

The dollar continues to benefit from the weakness of the single currency and the uncertainty swirling around the pound, but the pace of the rally seems to be slowing as the midterm elections approach.

The elections are being billed as the most important in living memory since they will be a judgment on the country’s view of the performance of President Trump as he approaches the halfway point in his Presidency.

A significant swing towards the Democrats which gives them control of Congress will be a significant blow to the President’s chances of passing controversial legislation. If the polls go particularly badly the Democrats may have enough sway to start impeachment proceedings.

The dollar’s rally is therefore not a given despite the woes of the single currency and a move through the previous high of 96.99 is not expected before the elections.

Tightening dollar liquidity has been a factor in the dollar rally and that support is likely to end in Mid-November just as the results of the midterms start to bite. This could choke off the rally for the greenback and lead to a stronger euro into the end of the year.

There are some significant support levels between 1.1220 and 1.1380 although it would take a major event to push the euro to test those levels.