Good morning,

GBP: What’s next?

Sterling did everything it could to make life a living hell for people who trade it yesterday. Although great moves in the price weren’t seen, GBP, especially against the USD, would not sit still for a minute. Trading currencies is often compared to trying to nail jelly to a wall; in yesterday’s case the jelly was there but the nails were made of rubber and our hammer was fashioned from marshmallow.

Following a five hour cabinet meeting, Theresa May was able to stand on the steps of Downing St and say that Cabinet had voted to support the Brexit deal as it stood. Sterling was little impressed and certainly as the extent of the opposition to her plans within Cabinet became clear, the pound retreated further.

Resignations have not come yet but were they to we see these as a negative for sterling. Those former ministers would then have a free vote in Parliment. More importantly, the parliamentary vote is a minefield that could lead to anything from a no-deal scenario to a general election. Is there any wonder sterling hasn’t rallied on this statement with such looming risks in the coming weeks still to be negotiated? If the pound could talk I think it would be saying “Consensus? I’ll believe it when I see it.”

The 585 page document that lays out the Withdrawal Agreement in full has many interesting points but the identification that the UK would remain indefinitely within the EU Customs Union is pertinent for two reasons.

Firstly it makes it more likely that Labour rebels and some Tory remainers will vote with the government when this deal comes to Parliament. Secondly, Liam Fox is not going to have much to do in the coming years; membership of the customs union means that we are unable to negotiate our own trade deals.

Sterling will now wait on how the news is taken by the Commons. Gains will be seen if Labour rebels make soothing noises but losses will come if the DUP throw their hands up in the air or the European Research Group actually back up their threats and amass enough names to challenge Theresa May for leadership of the party.

Sterling, and the UK as a whole, are over the first hurdle but there are many more to come and each will only see the height needed for a successful negotiation increase.

The one comfort we can take is that this is all playing out as we expected.

USD: Steady as she goes

There is, of course, a world outside the UK and influences away from Brexit. Amid the cacophony of Brexit headlines, Federal Reserve Chair Jerome Powell noted in a speech that while the US economy is powering ahead, there are headwinds to come and decisions will have to be made as to how far and fast interest rates rise.

“We have to be thinking about how much further to raise rates, and the pace at which we will raise rates,” Powell said during a question and answers session in Dallas yesterday. The goal is to “extend the recovery, expansion, and to keep unemployment low, to keep inflation low.”

We think the Fed will raise rates once again in December and twice in 2019 before pausing.

CNH: Chinese olive branch

The most important economic factor globally has never been Brexit but instead the deteriorating trade relationship between the US and China. overnight saw the Chinese government start to talk about concessions it may be willing to make to the US, the most major being an agreement to lift the cap on how much equity a foreign investor can hold in a Chinese company.

Further concessions may be made but for now markets are looking at these moves as a potential olive branch ahead of further meetings between Trump and Xi later this month.

Have a great day.