May Facing Difficult Task

Fail to prepare, prepare to fail!

Theresa May and her Ministers are aware of the issues that are caused by a lack of preparation and solid proposals when dealing with the EU over Brexit. For example,the prevarication over the three issues that the EU demanded proposals for prior to agreement to move to stage two of the talks caused a near disaster for the Government as the DUP threatened to withdraw support.

When talks started last March, the U.K. negotiating team could be forgiven for a lack of preparedness as they had no real forewarning of what the EU were going to demand. As stage two talks commence, no such excuse will be acceptable to either Parliament or the public. Theresa May has an opportunity to formulate and execute her plans for both the trade deal and the length of, and what is included in, the transition period.

Consultation with interested parties like the Confederation of British Industry will be vital to ensure that business needs are satisfied. Most of all clarity will be demanded in order that businesses can plan with some certainty for the future and return to investment in their operations the lack of which has led to virtual economic stagnation.

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Sterling ranges to narrow

The pound was mixed against the dollar and Euro yesterday as traders started to close their books for year-end.

Against a dollar which is still driven by tax reform, the pound recovered approximately half of its fall on Friday reaching a high of 1.3419 before dropping back to close at 1.3383. Overnight it has barely moved and is virtually unchanged from the U.S. close.

Versus the Euro, the pound struggled to recover Fridays losses making a day’s high of 1.1372 before closing a shade lower at 1.1360. The single currency has had no new influences recently, but political concerns continue to rise which could come to head in the New Year.

The outlook for Sterling is inextricably linked to Brexit but it is the wider ramifications that will be more important as we head into the New Year. The economy is slowing with inflation still a major issue. The “smokescreen” created by the MPC from behind which they blame the fall in Sterling since the Brexit referendum for price increases is starting to fade. They make no mention of the boost that should have been seen in exports from such a fall in the value of the pound. Business investment continues to plummet, and FD’s and CFO’s will be expecting clarity on the economy and Brexit to allow them to plan with a measure of certainty going forward.

Dollar caught up in Tax Reform

When Donald Trump announced at his inauguration that he would produce both fiscal reform and economic stimulus packages in the first year of his Presidency, most observers believed it would the stimulus package that would drive the dollar. The reality has been entirely different as the economic package hasn’t even seen the light of day and tax reform has taken up an inordinate amount of time both in Congress and analysts thoughts. The dollar index, in the meantime, has fallen from a high of 102.25 in March to a low of 91.01 in September.

The inability of administrators to agree on the package of tax reforms has been one driver of the dollar while the future path of inflation and interest rates has been another. In normal fashion when viewed from the outside, a degree of brinkmanship will develop before the tax reform bill will pass into law.

The change in Chairman and therefore emphasis by the Federal Reserve will have a more lasting effect. The fact that Janet Yellen only served one term shouldn’t cloud the fact that the vast majority of Chairmen serve at least two and often three terms in office. That means that when Jerome Powell takes over in February the markets can reasonably expect that he will be in office until 2026. This makes his initial impression doubly important, setting the tone for years to come.