Theresa May fails to finalise Brexit deal in Brussels, but agreement looking closer

Today's news headlines:

  • ‘EU hails “good progress” on finalising Brexit treaty’. Hopes build that Sunday’s summit will endorse deal. (Financial Times)
  • ‘EU begins disciplinary procedures against Italy after rejecting its controversial budget plans’. There are two weeks for the EU to decide if the Excessive Deficit Procedure (EDP) is to be implemented. (CNBC)
  • ‘Durable-Goods Orders decrease, a sign of slowing momentum in fourth quarter’. Number suggests business investment is stalling as trade war and falling oil prices bite. (Wall Street Journal)

Prime Minister Theresa May spent time yesterday with the European Union, attempting to finalise a compromise position for the UK’s exit from the trading bloc, but evidently, the two sides failed once again to deliver the goods. There’s a lot of support for the idea that common ground can be reached before Sunday’s emergency EU summit takes place, but two key issues linger. Onerous requests from remaining member states—such as Spain’s demands over the future of Gibraltar—could risk blocking progress, while ultimately any deal still has to be approved by the UK’s Parliament. With the Pound drifting fractionally lower, an air of uncertainty continues to linger. Failure to see progress at the weekend will, in turn, have the potential to further hammer the British currency.

Yesterday saw the release of more US economic data which served to highlight once again how the country’s recent boom era may be coming to an end. Durable Goods Order data for October was expected to disappoint with a print of -2.6% having been forecast, but the reality saw a -4.4% dip being recorded. With trade war concerns lingering and the slide in oil prices and a strengthening Dollar hitting import costs, the beneficial effects of Trump’s taxation shake-up are looking close to having been exhausted. Although the DXY Dollar index is still holding close to recent highs, even just a slightly dovish signal from the Federal Reserve could arguably be the trigger for a more protracted spell of USD weakness.

At 12.30pm GMT today, the European Central Bank (ECB) is set to publish its account of its most recent monetary policy meeting. The detail here could provide further insight as to just how feasible it will be for central bank President Mario Draghi and his team to stick with the proposed schedule for normalising monetary policy. Expectations remain that a rebound in growth in the final quarter of the year will allow the bond-buying to cease next month, although global economic headwinds could still prevent Mario Draghi from making that first rate hike before his tenure ends later next year. Any dovish signals in the meeting minutes would have the ability to serve up some Euro weakness in what could otherwise be a quiet day for fundamental data releases.

There’s no data from the US today and only a limited volume expected tomorrow, owing to the Thanksgiving break. As a result, volumes may be a little lighter than usual and this, in turn, could serve to increase volatility in the short term. We’ve seen a general improvement in risk appetite of late, driving trade away from the safe-haven allure of the US Dollar, and in the absence of any shock news, this theme may find itself being maintained in the hours ahead.

GBP/USD

The Pound has continued to trade in a very tight range against the US Dollar, with the market seemingly waiting for the next meaningful signal. Brexit sits very much at the heart of this as clarity here would have the potential to see the UK look more attractive to overseas investors, and in turn, start to encourage fresh currency inflows.

EUR/USD

Some modest gains have been recorded by the Euro in recent hours although there’s little to discern between the two currencies right now. There is, however, the risk of either the ECB or the Federal Reserve having to reign in rate aspirations, presenting downside risk for both the common currency and the US Dollar.

GBP/EUR

The Pound has been drifting a shade lower in recent days, but again, it’s an absence of clear direction over Brexit—and EU problems such as the Italian budget—which is preventing a breakout in either direction. It may be next week before this malaise can be broken.