A relative issue

The UK is set to leave the EU on Friday, but the jockeying to frame the subsequent trade negotiations has already begun. It actually started last week in a Financial Times interview with Chancellor of the Exchequer, Sajid Javid, who said that the UK doesn’t want to mirror EU standards and become a rule-taker. His attempt to scrap the old arithmetic—which would have reduced the UK’s access to EU markets based on the mirroring of trade standards and openness of labour markets—has not really changed the debate the way he might have wished.

Over the weekend, EU chief negotiator Michel Barnier made his stance clear. Rather than speaking in quid pro quo—a trade-off of specific terms—he focused on the effect of variations in the policy. The EU would be looking to enforce a ‘level playing field’, complete with a dynamic dispute mechanism. So the UK can have its own rules, but if they are deemed to advantage UK firms over their EU competitors, fines might be levied, etc. Before we get up in arms about small qualitative differences in standards, Barnier said the focus of this would be on state aid. This brings to mind the 15-year old dispute between the US and EU relating to state subsidies of Boeing and Airbus, respectively. So not only will the EU and UK need to create a set of rules and enforcement mechanism from scratch, but it’s not clear that is even possible given the experience of the US-EU aircraft saga.

Bottom line: The oft-cited criticism of the May government's negotiating approach was that it allowed the EU to frame the conversation and then found themselves trapped. It makes sense that the Johnson-Cumming’s first move would be to start from the beginning and agree on a new foundation, but that won’t happen without a fight. Much the way that Barnier’s approach is a reply to Javid’s comments, we wouldn’t expect the UK PM to accept this new EU position as final, but rather as just a counteroffer in the negation before the negotiation. 

 

The week ahead: 

GBP

Sterling’s movement continues to be primarily driven by the market expectation of an interest rate cut this Thursday which is likely to be the biggest risk event for the Pound. Last week, rates markets reduced their expectations of an interest rate cut, leading to a stronger Pound against other major currencies. Thursday’s announcement could break the Pound out of its January trading range, setting up a clearer trend for the rest of the quarter. With markets currently pricing in approximately a 60% chance of a rate cut, the outcome could provide some significant short-run volatility for the Pound. The week ahead is light for UK economic data.

EUR

Last week, the trade-weighted Euro Index broke out of its 10-week trading range to the downside, despite multiple key economic indicators beating expectations. However, this morning’s poor German economic sentiment surveys paint a bleak picture for the Eurozone powerhouse, potentially causing the trend to continue into this week as well. Last Thursday, the European Central Bank (ECB) decided to keep monetary policy on hold, and the following press conference with new Chief Christine Lagarde proved to be uneventful.

  • On Monday morning, the German IFO Business Climate and Expectations surveys came in below expectations, while the Current Assessment survey matched the market prediction.
  • German preliminary month-on-month CPI will be released on Thursday, providing the latest insight into German inflation. Expectations are for a -0.6% change in the price level for January, down from 0.5%.
  • The Eurozone aggregate flash CPI year-on-year release will be out on Friday, with expectations being a 1.4% change in the year to January, up from 1.3% last month.

USD

Last week, January’s trend of a stronger Dollar continued after a shaky start, breaking above major key moving averages. The trend has continued into the last week of January as risk-assets fall, and safe-haven assets rise following fears that the Coronavirus will affect the global economy. This Wednesday, the Federal Reserve will update markets on monetary policy, and while markets don’t expect any change, the Fed’s statement and press conference will provide an important update on its evaluation of the US economy.

  • On Tuesday, month-on-month Durable Goods Orders are expected to show a positive sign for US manufacturing with growth of 1.2% up from last month’s contraction of -2.1%.
  • Advance quarter-on-quarter GDP is the first of three GDP releases (preliminary and final being the other two), and expectations are for growth of 2.2% for the year to Q419 up from 2.1% previously.
  • On Friday, the Fed’s favoured measure of inflation—Core PCE Price Index—will post its month-on-month change, with expectations being price growth of 0.1%—unchanged from last month.
  • What’s more, Personal Spending and Personal Income will also be out on Friday, which will indicate the economic health of US households. Expectations are for growth of 0.3% for both measures.