Good morning,
One hundred BILLION euros (puts little finger to mouth)
I’d be lying if I said that yesterday was a particularly memorable day in currency. The rambling narrative of 3 or 4 political schisms – Conservative vs Labour, UK vs Europe, Trump vs Democrats and North Korea vs everyone – has not shifted dramatically over the past 24hrs save for a few new battle lines being drawn in the Brexit conflict.
Following reports of a testy dinner between Theresa May and Jean Claude Juncker the FT is leading today on reports that the UK’s divorce deal with the European Union will now cost EUR 100 billion. If you think this is all sounding very Austin Powers/Dr Evil then you are not the only one. The article goes on to say that “estimates are highly variable” (journalist for “not worth the paper they are written on”) but note that the increased demands are based on the desire by both Paris and Berlin for the UK to pay farm subsidies during any transitional arrangement as well as contributing to EU loans to countries like Ukraine and Portugal.
Sterling within the negotiations
Taking all of this in context alongside May’s pledge to be a ‘bloody difficult woman’ and the scene is set for negotiations to start slow and obtain little clarity from the get-go. As we have discussed in the past, and in terms of what happens to sterling, we think that there are 5 big issues to watch carefully as the negotiations unfold:
- The ‘Divorce’ deal – how quickly the costs of the uncoupling are sorted will determine when we can start talking about trade.
- The UK election – will a larger mandate for May mean anything in Brussels?
- The French election – A Le Pen win is an automatic boost for sterling.
- A transitional agreement – Article 50 dictates a hard stop in March 2019; can the UK ease into its new stance?
- What trading arrangement will we get? – Access isn’t the same as free access and an instantaneous move from the single market to WTO rules is a serious risk.
Michel Barnier, the EU’s top negotiator will be giving a press conference this morning at 10am BST.
Fed to have less of an impact than Trumpcare Mk II
In Washington it looks like Trumpcare is back for another vote. Reports suggest that the vote will go ahead unlike last time but a defeat for the White House is still the likely outcome. Another loss for the Trump administration is going to cause investors to ask just how many hills can this President die on before all his political capital is worth less than a degree from his university?
Dollar is relatively quiet ahead of today’s Fed announcement at 7pm. No change in rates is expected and we would expect the accompanying policy statement to aim investors very much down the middle of the road, limiting USD reaction.
That’s it from us although euro watchers will be minded to tune into a debate between Marine Le Pen and Emmanuel Macron tonight. It is only one before the vote on Sunday which polls continue to show Macron winning handily.
Have a great day