Good morning,

USD: GM and tariffs keep dollar mixed

The impact of political inaction and uncertainty are all too clear to see in the prices of the USD, GBP and the EUR this morning. We’re in the middle of a game of headline vs headline with the market reacting accordingly to each new news item.

For the US dollar, the trading relationship between the US and China remains the main catalyst for gains or losses. With Donald Trump as President, however, the messaging on what may happen next is always rather opaque hence the mixed picture on the greenback this morning.

Trump will meet President XI later this week with headlines this morning suggesting that while the two may agree to reach “mutually beneficial agreements”, that does not preclude another increase in tariffs in January as has been widely trailed in the past. We believe that higher tariffs are still good news for the dollar at the margin for now but wider economic pressures will be felt eventually; no President can look past the decision by General Motors yesterday to close factories and fire 14,000 employees.

We expect all four Fed members who are due to speak today to hold up market expectations of a rate hike in December.

GBP: Remember, remember the 11th of December

The meaningful vote on the Brexit plan – the crucible for Theresa May’s current Brexit deal – will take place on December 11th. There is still a lot of political manoeuvring to take place before MPs file into the division lobbies and note their assent or dissent to the deal. As it stands this morning, the parliamentary maths looks like a defeat on the cards for the Government with MPs seen as both backers of the PM and also Labour Leavers expressing their unhappiness with the deal.

The view that a defeat for the government would prompt a collapse in the value of the pound has rapidly become consensus which, in our eyes, therefore limits the chances that the collapse will happen. The need to second guess and pre-empt what the pound may do means that conversations I am now having suggest that sterling would only fall dramatically if a secondary vote also saw the government defeated. For my money, I think that any defeat for the government will see sterling move lower although the pound has recently moved higher, quicker on good news than lower on bad news. In other words, losses could be sharp but a relief rally on a deal also may be quick.

For now, we are back to watching headline after headline and updating the likely vote tallies on that Brexit vote.

EUR: Incremental moves

If Brexit were to suddenly disappear, then the Italian budget negotiations would easily be able to fill the hole left in my heart that only interminable political arguments can fill. Prime Minister Giuseppe Conte and his deputies Matteo Salvini and Luigi Di Maio insisted in a joint statement on Monday that the budget issue is “not a question of decimal points.” The Euro and local stock markets have reacted happily to any signs of willingness by the Italian government to acquiesce to pressure from Brussels.

We still like EURUSD lower than where it is now and further pressures on global trade flows by the Trump administration could easily be the catalyst.

Have a great day.