Upcoming Summit to discuss Brexit terms

There is a feeling among the UK negotiators that if the Brexit negotiations were left to the EU Heads of Government a deal is more likely to be struck than when dealing with the more hawkish EU negotiating team.

Theresa May and Dominic Raab see a more pragmatic and practical stance being taken by the Heads of Government as they are more likely to see the more practical aspects of the UK’s departure from the EU than Michel Barnier and Jean-Claude Juncker who see themselves protecting the integrity of the EU.

That theory is about to be put to the test as the first of three summits is about to take place at which EU diplomats will consider the proposals put forward by the UK for the future relationship even though both Barnier and Juncker have, in their own way, dismissed them.

As the countdown towards next March continues there is a growing feeling that the EU is starting to see the seriousness of a no deal exit and it is rumoured that Michel Barnier is working on a proposal for the Irish border issue which would allow for “frictionless” movement of goods across the border. There is talk of barcodes and automatic scanners but until the proposals are made public, the market will take every crumb of comfort it can.

Sterling rose again yesterday as optimism that a solution can be found to the Irish border problem was mixed with a weakening dollar to push it to a six-week high of 1.3166. It closed just eight pips from the high.

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Euro remains in narrow range

Pan-Eurozone inflation data was released yesterday. It showed that price increases in the region remain at 2% as they have been for three consecutive months now.

While it is a positive for the region that inflation is well controlled, it disguises a Central Bank that is at a loss to know how to stimulate growth, particularly since it is on the cusp of withdrawing accommodation that has been in place for several years now. This hasn’t had any real effect on either growth or inflation despite dire warnings from economists when the Asset Purchase Scheme was first put in place.

There are now concerns over the effect the withdrawal will have as banks will find themselves without the means to boost lending and Government borrowing (particularly in places like Spain, Italy, and Ireland) may be curtailed or costs will increase adding a further strain to key debt to GDP ratios.

While the issue of the Italian budget has gone away for now and Hungary simmers following the censoring of its Prime Minister by Brussels, the euro continues to drift in reaction to other major currencies. Its range versus the dollar is narrowing and is now between 1.1660 and 1.1780. As traders become more comfortable trading between those points, the potential for an explosive breakout grows although it is hard to see what the catalyst for such a move could be.

Yesterday the euro rose to a high of 1.1699 on the back of dollar weakness and closed at 1.1683.

ECB President Mario Draghi is making a speech this morning, but it is unlikely he will be anything other than dovish on monetary policy, even if he mentions the economy.

Inflation data unlikely to concern ECB

Consumer price data will be released this week in both the UK and Eurozone. While UK inflation is set to have risen from 2.7% to 2.8% year on year in August, it is unlikely that there will have been any change in the prices in the Eurozone where inflation remains very well controlled.

The Bank of England has now raised rates twice this year but have so far failed to dampen inflation while in the Eurozone, the ECB is about as sanguine about inflation as it is about the value of the single currency.

When you look at the relative levels of volatility between the dollar and euro it comes as a surprise that EU Commission President Jean-Claude Juncker felt it right to promote the euro as a viable alternative to the dollar as the global reserve currency. The ECB clearly feels that the fewer “moving parts” there are in the Eurozone economy the easier it is to control, so the volatility associated with being the global reserve would probably be most unwelcome.

Eurozone inflation is likely to be unchanged at 2% year on year providing further support to the notion of no change to monetary policy until Autumn 2019.

The subject of Mario Draghi’s replacement as ECB President continues to bubble below the surface with IMF Chief Christine Lagarde now apparently firmly in the running, which will interest BoE Governor Mark Carney who recently extended his tenure in his current role until January 2020.

The euro had a relatively strong week last week, reaching a high of 1.1722 and closing at 1.1623. However, it remains well within its recent range.