Good morning,

EUR: Slowing

Inflation disappointed in the Eurozone yesterday and limited the upside available to the single currency. We noted at the beginning of the week and in yesterday’s Italian election webinar that the support coming to the EUR from data is starting to wane and, given it’s the first of the month, we have a slew of PMI sentiment surveys from the Eurozone’s manufacturing sectors.

If these show slowing rates of growth and therefore a limited flow through to inflation then EUR could be in for a rough day.

GBP: Barnier throws down the gauntlet

As we expected, the moment Michel Barnier started speaking yesterday, sterling started to creep lower and was the worst performing major currency on the session as a result. As we walk in this morning, GBPUSD is at a 6 week low with GBPEUR the lowest for a fortnight.

The issues remain around what the triangular relationship between the UK, Northern Ireland and the EU will look like. Theresa May yesterday told the Commons that she was committed to the Good Friday Agreement, that there would be no hard border between Northern Ireland and the Republic, that we are leaving the Customs Union and the Single Market and that there will be no special status for Northern Ireland. All of these statements are valid in isolation but cannot be made compatible in unison.

Theresa May’s speech tomorrow is rapidly becoming her most important in months; Labour and the EU are on one side, Hard Brexiteers are on the other with sterling and the UK economy not knowing where to look. There are a few scenarios stemming from her words tomorrow that lead to a challenge to May’s leadership and another election but our PM is a master in fence sitting and obfuscating. Unfortunately, flipping the cards on Article 50 means the fence will fall over in a year or so when the negotiations must end unless a transitional deal is done.

Barnier’s comments on the transitional arrangement were stark telling journalists that “our technical discussions this week have confirmed that there are significant differences on citizens’ rights and on the application of new EU rules. And there are others. At this moment transition is not a given.”

We have noted before that the signing of a transitional arrangement is more important for sterling than interest rate expectations are, and it also holds true that the signing of a transitional arrangement is more important for interest rate expectations than anything else. It will only take one comment from a voting member of the Bank of England to undo a lot of the support provided to the pound by the belief that a rate hike is coming as soon as May.

Throw in the issues that are being seen in the retail sector at the moment and we think it almost absurd that 17.5bps of a UK base rate hike should be priced in for the Bank of England meeting in May.

USD: Trading troubles

Dollar cracked higher against the euro and pound yesterday although news flow overnight from Washington has the ability to upset the apple cart. Reports this morning suggest that President Trump is set to announce tariffs on steel that could amount to an additional 24% cost on all imports of the good. He has until April to decide but why not use it as a distraction from another high profile resignation within his administration.

US negotiators are also back to discussing the North American Free Trade Agreement with Canada and Mexico this week.

Have a great day.