Brexit back in focus as EU summit looms

Today's news headlines:

  • ‘Brexit: May attacked from all sides after EU exit deal unveiled’. PM faces bitter opposition from own MPs over exit terms. (The Times)
  • ‘Spain threatens to vote against Theresa May's Brexit deal ahead of summit’. Last minute objections risk further delay. (CNBC)
  • ‘The EU Is more worried about Italy than Brexit’. EU has fires to fight that are more damaging than Brexit. (Bloomberg)

With the US still largely closed for the Thanksgiving break, attention is set to remain very much on Brexit as the weekend break approaches, with Sunday’s cornerstone emergency summit amongst EU leaders in Brussels. Yesterday, a draft plan for post-Brexit ties between the UK and the trading bloc had been agreed, although support in Westminster seemed rather lacking. The Pound may have jumped almost a cent against the Euro off the back of the news, but enthusiasm for the deal quickly ran dry and yet again, Theresa May’s tenure is back in the spotlight.

The EU and the UK may have a form of words drafted, but these have to be agreed by Ministers from across the bloc in Sunday’s meeting. Reports of increased levels of pushback from various member states are being seen, and the risk is that a whole range of ‘riders’ may now be brought to the table, such as questions over Gibraltar’s future. The potential for further compromises to be made cannot be underestimated; although, with some careful management, these could prove to be net positive for the UK. As was seen yesterday, the prospect of emerging certainty over what lies ahead—rather than whether it’s necessarily a good or bad deal for the UK—is being well received by the market. A successful summit on Sunday has the potential to buoy the Pound further, although the political risk—both for Theresa May’s leadership and the will of Parliament to endorse the Brexit bill—will again serve to limit the potential for Sterling gains.

There’s a flurry of Eurozone economic data due for release this morning, although attention is likely to focus on the bloc-wide Purchasing Managers’ Indexes (PMI) which are scheduled for 9am GMT. There’s been plenty of talk of the Eurozone economy bouncing back in the fourth quarter, so these preliminary prints for November will be closely followed. However, expectations point towards modest declines being posted which would once again call into question the European Central Bank’s (ECB) ability to stick to its proposed schedule of monetary policy tightening. Such news would have the potential to push the Euro significantly lower.

Although many in the US will be making the most of the long holiday weekend, US PMI data is expected for release at 2.45pm GMT. Expectations for this print are broadly unchanged to slightly higher, so any deviation from this—combined with the fact the holiday weekend is likely to see volumes suppressed—could result in a meaningful breakout for the Dollar. The market is looking for signals that the Federal Reserve will need to reign in its pace of interest rate hikes next year, and any hints that such a situation may unfold have the potential to send the DXY Dollar index down to fresh lows for the month.

GBP/USD

News of Brexit progress yesterday saw the Pound jump around one and a half cents against the US Dollar, although a modest retracement followed. Uncertainty over what happens next in Brexit, plus the absence of any US economic data left the pair in a tight range overnight.

EUR/USD

The Euro has been posting very modest gains over the US Dollar since the middle of the week, but today’s US PMI numbers could initiate a noticeable breakout in either direction.

GBP/EUR

Yesterday’s notable gains for the Pound over the Euro underlined the market’s desire to embrace anything looking like clarity over the UK’s position post-Brexit. Further progress at the weekend’s EU summit could see another move like this being posted. However, this needs to be balanced against UK political risk and the fact that Sunday’s agenda could be clouded by fringe demands being made from other European states.