A hard Brexit is looking like a real possibility – 28th November 2017

A hard Brexit is looking like a real possibility – 28th November 2017

A hard Brexit is looking like a real possibility as the EU’s leadership have once again issued another ultimatum to the UK’s Brexit negotiating team over the three primary areas they require proposals on before talks can move to discussing the future relationship between the two sides. The UK’s offer over the financial consideration looks likely to be made at forty billion Euros; there are rumours the UK is set to make concessions over the treatment of EU nationals remaining in the UK after March 2019 (any concessions will likely anger Brexiteers who will see such a move as contrary to the original question asked in the referendum).

The third and final point, the question of the Irish border has come out of nowhere to become the most contentious of the three. The reason for this is that it raises the issues that have seen the North and South of the island be at each other’s throats for almost one hundred years. The Republican South say they will veto any agreement that creates a “hard border” as it could spell disaster for their economy only now recovering from the financial crisis. The Unionist North, who are propping up Theresa May’s minority Government, want a closed border and the Republic to be “cut off” from the rest of the U.K.

Despite these challenges, Sterling reached a two-month high against the US Dollar yesterday reaching £/$ 1.3384 before falling back to close virtually unchanged on the day at £/$ 1.3320. This was as much a US Dollar move as it continues to suffer from the inability of congress to pass fiscal reform legislation. Versus the Euro, Sterling has been treading water, capped by traders’ reluctance to buy Sterling due to Brexit uncertainty but supported by the issues facing Germany and the easy monetary policy being followed by the ECB.

Last week Sterling reached a low of £/€ 1.1095 but since then has rallied to £/€ 1.1309 before drifting back into its present range between £/€ 1.1150 and £/€ 1.1250. As the market thins out through December and year-end approaches, liquidity will dry up a little and with the EU Heads of Government Summit on 14/15 December Sterling could spike in either direction based upon whether a decision is made or not.
The new Chairman of the US FOMC, Jerome Powell, followed the sentiments of his predecessor Janet Yellen last night by saying he expects interest rates to rise and the size of the Fed’s balance sheet to fall, both gradually. Powell is likely to tread a different path to reach the same destination. Where Yellen was proactive, Powell will be data-driven. Where Yellen favoured pre-emptive action, Powell will be more pragmatic.

The US Dollar is likely to remain supported at these lower levels as Powell’s words could be interpreted as confirming his desire for a hike at the December FOMC meeting although November’s employment and inflation data will be released before then.


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