Good morning,

Brexit begins

Last week’s economic volatility is to be replaced once again with politics at least today as Brexit negotiations finally begin and French President Macron celebrates a landslide win for his En Marche party in the French parliamentary elections.

A surprise Bank of England push towards a rate hike acted as support for sterling last week and while movements in interest rates markets, especially on speeches from Bank of England members may allow for some support in sterling, political risk is still very much front and centre. David Davis and Michel Barnier will meet at 10am London time and a joint press conference on the lay of the land will be made at 5.30pm.

Progress is positive 
Sterling’s reaction to these negotiations is pretty binary and despite the shot in the arm that the Bank of England’s move towards an increase in interest rates to deal with inflation provided the pound, we and the majority of market participants are expecting the pressure to remain on the pound through these negotiations. Progress is positive and unless there is a sea change in political thought in the coming days on matters such as paying a ‘divorce settlement’, the Irish border, Gibraltar and the rights of EU nationals in the UK and vice versa then progress may be hard to find.

Sterling is flat on the session so far, having recovered from a slight blip lower as Asian traders reacted to the news that one person was killed and 8 injured as a van drove into a crowd gathered outside a mosque in North London.

Fed on hold for a while
Despite the Federal Reserve delivering a rate hike and the language to match last week the dollar is looking a little soggy this morning as focus once again shifts to a poor level of inflation creation within the US economy. We now think that the Federal Reserve will hold rates as they are until CPI and other inflation measures are moving more purposefully towards the Federal Reserve’s 2% target.

Poor retail sales numbers as well as a slip in industrial production will have also dulled the dollar’s lustre that remains tarnished by the politics of a White House unable to meaningfully advance its policy agenda.

Now Macron must get to work

One politician who should have a chance advancing his policy agenda is French President Macron whose En Marche party won the largest majority in a legislative election for 15 years. The Macron Presidency with a policy agenda of closer unification of Europe and with an increasingly strong economic wind and its back is a positive for the single currency in the coming months. Longer term economic and political success weighs very heavily on this Macron government; a term that is waylaid by scandal or obfuscation or a lack of good ideas and the far-left and far-right politics of the Presidential election will gain even more strength in 5 years’ time.

The Day Ahead 
Today’s data calendar is quiet and focus will fall on Brussels as the negotiations on Brexit final get going.
 Have a great day.