Barnier spikes trade talks, but boosts transition period

Michel Barnier, the EU’s chief negotiator, prompted a spell of swift weakness in sterling yesterday as he stated there had not been sufficient progress in Brexit talks to move on to the next stage of the discussions. No next stage means no trade talks, and trade talks are, ultimately, what the UK needs to secure an economically sound Brexit.

The stalled talks are still bogged down by the so-called divorce fee, the sum the UK would transfer to Brussels to settle outstanding liabilities. Those looking to sell sterling, not to mention those at 10 Downing Street, will be hoping for progress on this soon; the longer the instability, the longer sterling will stay weak.

However, there did appear to be some movement on other key issues in Brussels: the tail-end of the session saw a report in German newspaper Handelsblatt, which suggested the European Union are warming up to the prospect of a two-year transition period within which the UK would still have access to European Union markets, agencies and directives. While this is far from a new concept, it’s the first time we’ve heard Brussels mention it outright, which led to the pound erasing much of the losses suffered earlier in the day.

Stronger inflation figures put dollar on the front foot

After trading softer in the wake of Wednesday’s Federal Reserve minutes, the dollar recovered on the back of a strong producer price inflation release. The US producer price index lurched ahead of expectations in September as core prices grew at twice the rate that analysts had forecast, with no impact on data collection despite the hurricane season in the south-east. Much of the leap in producer-facing prices was as a result of energy input costs (the likes of gasoline and distillates) which could reverse in the coming months as the weather calms down.

What’s critical for the broader inflation picture is this afternoon’s CPI print and that’s why markets haven’t carried the dollar significantly higher.

ECB likely to extend QE beyond December

With political rumblings in Spain ebbing away, the attention’s turned back to the European Central Bank who, according to Reuters, are broadly in agreement to extend their asset purchase program from their October meeting onwards. At present, their asset buying schedule ends in December, so a modest extension seems reasonable to keep the Eurozone on track.

EUR/USD’s staged a firm rally this week, but these ECB headlines twinned with stronger inflation numbers in the US have comfortably knocked the pair off yesterday’s highs.

The US inflation numbers are due at 1330BST alongside US retail sales. Bank of England governor Mark Carney is due to speak to CNBC at 1800BST.

Have a great weekend.