Sterling Gains on Brexit Optimism

Pound at two-month high

Despite British Prime Minister Theresa May denying that a financial agreement has been reached with the EU, traders are willing to accept that the offer of up to fifty billion Euros supposedly made to Brussels is going to be sufficient to unlock stage two of Brexit negotiations.

It will be a telling statement of intent if the EU is prepared to accept that there has been sufficient progress over the other two outstanding issues and allow talks over the future relationship between the U.K. and EU to begin.

The pound is now trading comfortably above its closing rate on November 2nd when it fell following the comments made by the Bank of England in the wake of the interest rate hike. Yesterday it reached 1.1339 versus the single currency and has continued to rally overnight, trading as high as 1.1361. The high reached initially on November 2nd of 1.1407 remains a target but the pound will require fresh impetus to breach that resistance.

The pound continues to make solid gains versus the dollar which is still reacting to the uncertainty over next month’s proposed rate hike by the FOMC. A developing spat between Theresa May and Donald Trump over some retweets from the President supposedly supporting right wing groups in the U.K. is unlikely to have any effect on the currencies unless it escalates dramatically.

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Brexit negotiations at a crossroads

Comment over the recent progress over Brexit talks has come exclusively from Brussels recently and has demonstrated perfectly the bureaucratic mess the EU finds itself in.

Jean-Claude Juncker the President of the European Commission has intimated that talks are progressing well and that they have intensified over recent weeks while Donald Tusk President of the European Council has said that more work is needed, and proposals need to be delivered by December 4th. The Chief Negotiator Michel Barnier has been strangely silent presumably getting on with the job at hand.

As we enter the final month of the year, the inference is that talks have reached a crucial point.

The U.K. has apparently more than doubled its financial offer although there is no indication of an agreement over the other two issues; the Irish Border and the treatment of EU nationals remaining in the U.K. post-Brexit. With the EU Heads of Government summit on 14/15 December expected to rule on the commencement of stage two of the talks, time is running out.

The uncertainty over Brexit has been the primary feature of Sterling’s performance this year, and as liquidity fades as year-end approaches it is impossible to predict a closing rate on 31st December without adopting a positive or negative view on Brexit.

U.S. growth surprise fails to lift dollar

The dollar index was unmoved yesterday by data that showed that the U.S. economy grew by 3.3% in the three months to September. This was a stronger than expected revision but the lack of movement in the dollar illustrates perfectly the concerns of the FOMC over the lack of inflation in the economy despite above trend growth.

Inflation-free growth appears to be a new phenomenon as the global economy emerges from the financial crisis of the past ten years and Central Banks start to consider the withdrawal of additional support.

There is a clear difference of opinion between the Fed and ECB about how to deal with this situation as both economies start to perform well yet price rises remain benign. Jerome Powell the Chairman elect of the FOMC is expected to “take a leaf out of Mario Draghi’s book” and act reactively to any change although he won’t be quite so dovish as the ECB President in his advance guidance to markets.

The dollar index has fallen a little overnight in response to the heightening of tension as the market awaits a response from President Trump over North Korea’s continued testing of missiles and the revelation that it can now strike the entire U.S., a claim that is unlikely to go unanswered.