UK awaits Brussels comment on Brexit proposals

Dominic Raab, the new UK Brexit Minister, starts his job in earnest today as the negotiations over the UK’s departure from the EU start again in Brussels. There has been no official comment yet from Brussels regarding the Brexit white paper which was published by the UK Government on Friday.

The UK’s proposals are just about as far as Prime Minister Theresa May can go regarding a soft Brexit and retain support from her Ministers. Any further demands from Brussels are going to lead the country further down the road toward a no-deal or hard Brexit.

The EU has a tough decision to make. The end -game is that the UK is going to leave the EU as things stand but the manner of its departure is going to have ramifications. If it rejects the UK’s proposals, it is almost certain that a hard Brexit will ensue. It depends on how the proposals on the four freedoms are viewed as Brussels has already said “cherry-picking” is out of the question. The UK basically want to continue free movement of goods, remain part of free movement of services with a few crucial alterations but opt out of free movement of labour. Free movement of capital has been “kicked down the road”.

It will take some clever negotiation to find a form of words that says something different on the movement of goods but means no change. This is the only way that the open border between the north and south of Ireland can remain. The Dublin Government will veto any agreement that means a hard border but if the UK crashes out of the EU next March without an agreement then their veto is worthless and economic disaster follows.

The pound closed stronger on Friday, closing at 1.3233 versus the dollar but had suffered earlier in the day as rumours swirled around Westminster of further Cabinet resignations.

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Dollar to continue to dominate

In a world that was dominated by economic activity and monetary policy, the dollar index would already be trading at close to 100. As it stands, the vagaries of President Trump’s trade policy and his overall unpredictability mean that the greenback is subject to drivers that really should not concern markets.

This week the U.S. releases data on retail sales and while this is not the most eagerly awaited set of numbers they will add a little colour to the rate hike canvas being painted by the Federal Reserve.

Fed Chairman Jerome Powell will make a speech on Wednesday in which he will continue his hawkish tone on interest rates.

When Powell was nominated for the role by President Trump it was clear that he would be taking some advice from the President on what he expected the Fed to achieve. A normalization of rates was the target in shorter time than the economic data demands. Powell, a lawyer by profession has had to go against his instincts and press ahead with tighter monetary policy despite a lack of evidence to back the decision. He has already raised rates twice since his appointment in February and the Fed is expected to raise twice more this year.

This is fuelling the U.S. trade deficit since, as the dollar strengthens on the back of a widening interest rate differential, it offsets the cost the import of goods even with tariffs attached.

The dollar index remains hemmed in, as is most of the market, as the “summer lull” approaches. On Friday it fell back to a low of 94.68 and closed at 94.70, still unable to successfully penetrate strong resistance at 95.25.

Euro threatened by further political unrest

Emmanuel Macron, the French President, last seen cavorting in the VIP box at the World Cup Final as his country won the tournament is facing difficulty at home as his popularity plummets.

Elected as a candidate of the middle ground, the French Left has accused M. Macron of spending his first year in Government pandering to the wishes of the elite and wealthy, lowering taxes and pushing through labour reforms.

It is entirely natural for a Head of Government in any country in the world to suffer a dip in popularity once he has been elected as it is never going to be possible to enact every election pledge immediately. However, since Macron is the leader of a new party radical change was expected but, on that pledge, he has failed to deliver. He was forced to speak to the entire Parliament recently to reinforce his goals and aspirations for France as he has been criticized for using his position to further his vision for Europe and little more.

In Italy, there are continued rumblings about the country’s ongoing membership of the Eurozone. The new radical nationalist government continues to question the benefits to the country of having its economy tethered to eighteen others and rancour remains over the treatment of Rome by Frankfurt/Brussels during the financial crisis.

Politics will be the major stumbling block over a more Federal Europe and it is a testament to this fact that economic releases from the larger economies appear to dominate Eurozone wide data despite the assurances from the ECB that that is where monetary policy is denominated.

The euro is drifting in a range with little new news to drive it in any direction., It closed on Friday at 1.1686 just ten pips higher than its opening level.