Brexit hopes rising for no good reason
The pound made an eight-week high against the dollar yesterday as an irrational expectation for a breakthrough in the deadlock over Brexit washed over traders. The only thing that can be said for developments over the past two weeks or so is that negative comments have been kept to a minimum. Jean Claude Junker’s positivity was balanced by caution from Donald Tusk but that apart negotiations have been taking place behind closed (and sealed) doors.
This news blackout has led to a feeling that at the 11th hour a deal will be agreed where talks can be moved on to stage two where the real negotiations can begin. The discussion up to now has basically been about how much the EU expects the U.K. to pay for the privilege of remaining a part, in some form or another, of the single market. The Irish border has thrown a spanner in the works and that impasse needs to be solved. The EU is likely to accept a pledge from the U.K. over the treatment of EU citizens remaining in the U.K. as it will have to concede that the U.K. is not going to enshrine protection or outside rule for a certain group in its constitution.
Carney voices concerns over Brexit
Mark Carney, the Governor of the Bank of England, has this morning entered the debate about the effect of a hard or disorderly Brexit on the U.K., its economy and currency. In a speech he has said that higher rates and lower growth and an increase in unemployment would be the short-term result of a disorderly Brexit. He believes that U.K. banks will be able to cope with the issues that would arise, but extra capital would need to be raised.
Speaking as the results of the latest stress tests were announced, Carney said that overall the banking system within the U.K. is strong enough to cope with anything Brexit will deliver. However, were Brexit to have wider ramifications for the global economy and/or there were further fines for misconduct he would be concerned about the current level of capital.
He went on to say that he believes the cooperation between the Bank of England and ECB will continue to be unaffected by Brexit.
Dollar awaits Powell’s confirmation
The dollar continues to be driven by interest rate expectations as Janet Yellen leaves her post as Fed Chair to be replaced by Jerome Powell. In prepared remarks to Congress yesterday Powell said that he saw interest rates rising in the near term and a reduction in the size of the Fed’s balance sheet. In this, he plans to continue the policy initiatives of his predecessor although the route may be different.
Powell will be confirmed as the 16th Chairman of the Federal Reserve today when Congress votes on his appointment. Inflation will remain his primary focus as the normalisation of interest rates continues. Over the past few months several FOMC members have voiced concerns over not only the current level of price increases but the also the source of sufficient price pressure in the coming months to necessitate further rate hikes. Interest rate expectations are the prime driver of dollar strength and any wavering from the Fed could see the dollar index test 90.00.