City Financial Worries Weigh Down Pound
Sterling fell against the US Dollar and the Euro on Tuesday morning as Michel Barnier’s comments regarding the City’s ability to trade on the continent post-Brexit worried traders. The chief EU negotiator said that the UK’s government should not hope for a bespoke deal that would allow British banks and financial firms to trade freely with the EU. Barnier said that “there is not a single trade agreement, which is open to financial services”, dashing Theresa May’s hopes for a special deal with the EU.
Stock market indexes hit record highs with investors feeling enthusiastic about the prospect of the significant US corporate tax cuts coming with the long-awaited Republican tax reform plan. Three Republican senators who had expressed doubts about the plan, in previous days, said that they will finally vote in favour of it. This increased the possibility of Donald Trump signing it into law before Christmas.
Pound Sterling – UK Markets
Today, the Pound inched lower against the US Dollar with the exchange rate set at $1.33. Sterling fell against the Euro with the exchange rate set at €1.13. Brexit negotiations are in the spotlight today as there are no significant economic data releases coming from the UK.
According to a report by The Guardian, the chief EU negotiator, Michel Barnier, ruled out any special deal which would protect the City’s ability to trade on the continent. Barnier stressed that “the British have chosen themselves the red lines. In leaving the single market, they lose the financial services passport.” The EU negotiator noted that there is not a single trade agreement that is open to financial services.
Brexit secretary David Davis has previously called for a unique trade deal with the EU, which would include financial services. Barnier’s comments seem to put an end to hopes for striking a deal of that kind. According to government sources, Davis will warn the EU side that it won’t be allowed to “cherry pick” the sectors of the UK’s economy it wants included in any future trade arrangement.
US Dollar – US Markets
The US Dollar dipped against the Euro with the exchange rate set at €0.84. The US Dollar Index (DXY), which measures the strength of the Dollar against six major currencies, lost ground, coming in at 93.52. Later in the afternoon, the Department of Commerce will publish data regarding building permits in November.
Neel Kashkari, the Minneapolis Fed President, told Wall Street Journal reporters that next year’s expected policy path is a risky situation for the Fed’s board. Kashkari said that that he is “concerned about what the bond market is telling us.” He noted that the Fed runs a risk of setting in motion a process where inflation won’t return to its target, adding that a significant number of policymakers are counting on faith to deliver the outcome they want to see.
Republican hopes to pass the tax bill revived when senators Mike Lee from Utah and Susan Collins from Maine said that they will vote in favour of the plan. Lee tweeted that the reform slashes taxes for working Utah families and that he would proudly vote for it. Only Jeff Blake, the Republican senator from Arizona, is now left publicly undeclared on the bill.
Euro – European Markets
The Euro strengthened against the US Dollar with the exchange rate set at $1.18. Eurostat released data regarding Eurozone’s construction output in October.
The construction output in the Euro-bloc during October rose by 2.0%, on an annualised basis. The result surpassed analysts’ expectations for a 1.1% rise. However, a negative surprise came from an unexpected decline in construction output, on a monthly basis this time. Output declined by 0.4%, instead of increasing by 0.1% as it was anticipated. Eurozone wages in the third quarter increased by 1.6% instead of the expected 2.0% figure.
The Federation of German Wholesale and Foreign Trade published its forecasts for 2018 which showed that exports and imports will hit record highs during next year. The German CESifo Group published its Business Climate survey for December which indicated that business confidence in the strongest economy of the Eurozone suffered from the breakdown of talks regarding forming a coalition government.
Other Currencies – Highlights
Sterling dropped against the Australian Dollar, trading at 1.74 AUD. The Reserve Bank of Australia (RBA) published the minutes from its last board meeting. The RBA’s board kept interest rates unchanged because “it would be consistent with sustainable growth in the economy and achieving the inflation target over time.” RBA’s policymakers believe that “an appreciating exchange rate would result in a slower pick-up in domestic economic activity and inflation.”
The Pound lost ground against the New Zealand Dollar, trading at 1.91 NZD. ANZ Bank released its Business Outlook survey which indicated that 38% of businesses are pessimistic about the year ahead. Business confidence in December remained in low levels, similar to November’s readings. Another report by Westpac showed that consumer confidence dropped in the last quarter, below average levels.
Sterling slumped against the Swiss Franc, trading at 1.31 CHF. The State Secretariat for Economic Affairs (SECO) revised its economic growth forecasts for the next year. SECO expects that the Swiss economy will expand by 2.3% in 2018.