May at Odds with EU on New Trade Deals
The Pound edged up against the US Dollar while it suffered losses against the Euro on Monday morning. Prime minister Theresa May will attend a meeting with senior ministers, who support Brexit, to discuss how the future trade deal with the European Union should be formed. Later in the afternoon, Theresa May will inform the members of the House of Commons about the results of last week’s EU Summit regarding Brexit. Media reports state that she is going to express the will to finalise trade deals with non-EU countries during the transitional period. EU officials have said that signing any deal of that kind would mean that a red line has been crossed, as it would oppose customs union rules.
In the US, Republicans are confident that the Senate will pass the tax reform legislation, possibly as early as Tuesday, and that President Trump will be able to sign the bill just before the Christmas holiday. In the Eurozone, November’s inflation came in at 1.5% as it was anticipated, but core inflation fell unexpectedly.
Pound Sterling – UK Markets
Today, the Pound strengthened against the US Dollar with the exchange rate set at $1.33. Sterling lost ground against the Euro with the exchange rate set at €1.13. The most significant economic data release for this week is the third quarter’s GDP data, due on Friday.
UK Finance, which represents 300 of the leading financial firms, including banks in the UK, urged prime minister Theresa May to put the City at the centre of negotiations with the EU, or else the economy might suffer a blow. The UK Finance’s open letter to May and Chancellor Philip Hammond, said that “pragmatic decisions to align the two regimes from a regulatory perspective should be seen not as concessions, but as mechanisms to maximise benefits for the benefit of citizens and economies.” In the letter, the prospect of a Canada-style free trade agreement with the EU is described as “an interesting template.”
Theresa May will be holding talks with some of the Brexit-supporting senior ministers, in order to learn their opinions on how the future trade relationship with the EU should be. The prime minister is also expected to speak in the House of Commons today. Media reports noted that, in her remarks, she will insist that signing free trade deals with non-EU countries during the transitional period is an option, and that she will try to finalise them when possible.
US Dollar – US Markets
The US Dollar fell 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, retreated to 93.83. The tax reform and the US GDP data for the third quarter of 2017 are going to dominate the news this week.
John Cornyn, who is considered the no.2 Senate Republican, told ABC reporters that he is confident that the Senate will pass the tax reform legislation “probably on Tuesday.” Kevin Brady, the top Republican tax writer in the House of Representatives, seemed to agree with him, saying “I think we are headed- the American people are headed- for a big win on Tuesday.” President Donald Trump aims at having the bill signed by the end of the week, just before Christmas.
On Friday, Republicans released the final tax plan, which includes many compromises in order to minimise the differences between the two separate versions passed by the House and the Senate. The GOP plan would cut the corporate tax to 21% from the current 35%, with the change taking effect in 2018. Obamacare would be scrapped and some state and local tax deductions would be capped.
Euro – European Markets
The Euro surged against the US Dollar with the exchange rate set at $1.17. The major economic data release coming from the Eurozone today is the report regarding inflation in November.
According to Eurostat’s report, inflation in November came in at 1.5%, on an annualised basis, in line with economists’ expectations. The negative surprise came from core inflation which didn’t rise to 1.0% as it was expected, but instead fell to 0.9%, on an annualised basis. Some economists noted that the drop in core inflation could be a message to the ECB’s hawkish policymakers that reducing the monetary stimulus programme, as much as possible, might not work in favour of the Eurozone’s economy.
Francois Villeroy, the Governor of the Bank of France (BoF) and one of the ECB’s governing council members, said that “Bitcoin isn’t money, it’s purely speculative in nature.” Villeroy mentioned that there isn’t any formed bubble in the French mortgage market and that he expects the unemployment rate to fall in 2019. The French banker praised Emmanuel Macron’s reforms for which he said that they are pointed in the right direction. Villeroy also called for more European market mergers.
Other Currencies – Highlights
Sterling fell against the Australian Dollar, trading at 1.74 AUD. The Treasury published the Mid-Year Economic & Fiscal Update (MYEFO) and the economic growth forecasts for the next four years. According to these reports, the 2017/18 budget deficit will be almost $6bn less than the May budget forecast. The Australian government expects the budget to return to a surplus in 2020/21.
The Pound slumped against the New Zealand Dollar, trading at 1.89 NZD. The fourth quarter’s GDP data will be published on Thursday with ANZ economists retaining a positive view on medium-term growth prospects. They are, however, noting that the unease regarding the new political direction and a softer housing market, might put a strain on growth over the next few quarters.
Sterling lost ground against the Swiss Franc, trading at 1.31 CHF. An ING report said that the Swiss economy is set for a bounce back in 2018 with stronger economic activity being fueled by external demand.