Good morning,

Another weekend, another EU summit

Bratislava was the host city for the latest EU leaders summit, a summit that did not include UK PM Theresa May. Headlines from the meeting seem to be rather sparse although Italian PM Renzi has emerged the least happy, calling for action and not just another “cruise down the Danube.” Once again however, it is German politics that is gaining much of the headlines this morning.

The Alternative fur Deutschland party that had beaten Angela Merkel’s Christian Democrats in her home state a fortnight or so ago made gains in the Berlin regional elections although only managing to come fifth overall. Merkel’s party came 2nd but with a falling share of the vote, hints are increasing that her party will lose its junior coalition partnership within the state government.

Fortuitously enough for Merkel and markets, that is the last German election until next year. Regional elections kick off again in March and continue in May. Time for the Chancellor to regroup ahead of the general election later in the year.

Brexit news was summarised by a leak from an EU president that Theresa May is looking to trigger Article 50 by February of next year. The impact on sterling has been little and once it happens will largely depend on whether it is believed that the UK is in a strong enough position to withdraw within that 2 year time frame that Article 50 affords.

Washington and Tokyo

All eyes this week will not be on Europe however but instead on both Washington and Tokyo ahead of the latest policy meetings from both the Federal Reserve and the Bank of Japan. We maintain our near-term belief that both central banks have not shown us enough to believe that a change in stimulus/policy is on the way.

Last week’s data picture from the United States was mixed with inflation markers gaining somewhat but retail sales were lacklustre and speeches from both Fed members Tarullo and Brainard seemed to discount away the chances of a hike in interest rates at this month’s meeting. Prediction markets are stuck at around a 20% chance of a move higher in rates this Wednesday and a 55% chance in December.

There is a dovish risk to the USD coming out of the meeting although there will likely be some buying of USD into the policy announcement itself.

In Japan, the conversation is a different one; rates are not going higher and nor do we believe that they are due to come lower at this meeting. The Bank of Japan has limited scope for a surprise and tinkering with their bond buying program is the most likely outcome from their meeting in the early hours of Thursday morning.

The Day Ahead

Today should be a quiet one although positioning ahead of these central bank meetings. Later in the session the minutes from the latest Reserve Bank of Australia meeting are unlikely to inspire too much volatility at all.

Have a great day

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