Good morning,
GBP: Messed DUP
Sterling was up and down and all around yesterday as it reacted to the deal/no deal back and forth in Brussels and Belfast. The dismissal of “no regulatory divergence” by the DUP party means that Theresa May finds herself in a familiar bind; unable to say yes in Brussels without jeopardising the relationship that is keeping her in power in Westminster.
‘No regulatory divergence’ i.e. the same rule set in County Donegal and County Down is tantamount to saying NI isn’t leaving the EU. Given the stance of the UK government remains that we will no longer be part of the Customs Union, having the same rules in Northern Ireland as they do in the Republic shifts the customs border to the Irish Sea and the ports of Liverpool, Holyhead and Stranraer.
Agreement on the Irish border alongside chatter of deals on the divorce bill and the rights of EU citizens will have made it almost a certainty that next week’s European Council meeting will allow the ‘sufficient progress’ target to be hit. Our base case remains that we will see the UK and EU agree that ‘sufficient progress’ has been made at next week’s meeting but unfortunately the fudge quotient is a little higher after yesterday’s politics.
Sterling traders will also be closely eyeing today’s services PMI announcement. The manufacturing and construction PMIs have been better than expected but only make up around a quarter of the UK economy that the services sector does. The number is due at 09.30.
EUR: German and Catalan politics
Again we see the power of politics and lack of certainty drive home fears about economic growth and stability. Angela Merkel has not yet formed a coalition which has seen her Democratic Union party resume talks with the Social Democratic Party. Euro investor confidence has fallen across the continent. We saw the overall Sentix index drop from 34.0 to 31.1 with a notable drop in Germany from 42.4 to 39.1.
Despite the recent run of strong economic data and sentiment, this will be a disappointing reading to Mario Draghi and the ECB as it adds another wider avenue of concern alongside inflation.
The Catalan election takes place on the 21st December with all 135 seats available. After invoking Article 155 and removing the entire government the election race has now been set in motion.
Up today we have European PMI following numbers from Spain, Italy, France and Germany at 9am GMT. We look for another robust set of figures to see off 2017.
USD: Trade, taxes and Trump
Recent news of US tax cut plans being passed on Saturday (by a tight margin) certainly helped the dollar on Monday. The next step for the Republicans is to organise a committee with a handful of trusted conferees, to negotiate the reforms between those in the Senate and the House. Republicans and congress are furiously trying to get these new reforms in place before Christmas.
Today we have trade balance numbers. This will give us the balance between export and imports in the US. A positive number shows a surplus while a negative shows a deficit. The numbers are expected to deepen the current deficit to -$47.5Bn from -$43.5bn considering the strong dollar.
We then see services PMI data giving us an indication to the health of the services sector. This number is expected to improve as well.
Have a great day