17/10/2017 - Brexit Negotiations Heading For Breakdown

GBP

The pound was sold off yesterday after reports that Brexit negotiations could be heading for a breakdown unless the EU allows talks to progress to trade and transition arrangements at this week’s summit of EU leaders.

The new draft of European Council summit conclusions has presented a major stumbling block in the ongoing negotiations and has led senior British ministers to question the willingness of the EU to strike a deal.

The latest text includes tougher language on the progress that Britain needs to make before the future trade arrangements can be discussed. It also demands that the European Court of Justice must have a role in guaranteeing the rights of EU citizens living in the UK after Brexit. This poses a direct challenge to one of the red lines in Theresa May’s negotiating position which involves ending the rule of the ECJ.

It was also suggested that May took a major political risk during her speech in Florence last month by pledging to pay into the EU budget and settle the divorce bill. 

A major EU diplomat said that it is for May, not the EU, to make further concessions and live up to these promises. The diplomat added that the bloc needs clear commitment on where the UK is prepared to pay beyond the 20 billion euros promised during the two-year transition phase which ends in March 2019.

Shortly after the report was published, the Brexit department shrugged off the suggestions and stated that they are taking forward the negotiations in a “constructive and responsible way”.

USD

The dollar remained broadly higher on Monday despite the weaker than expected US inflation data released on Friday which raised doubts over whether the Fed will hike rates by December.

Fed Chair Janet Yellen on Sunday said that the US economy remained strong and that the strength of the labour market calls for continued gradual increases in interest rates despite soft inflation.

Speaking at an international banking seminar, she went on to add that the Fed expects a temporary slump in growth off the back of the recent hurricanes but that this should be followed by a rebound before the end of the year.

The speech followed the Feds decision to leave its benchmark short-term rate unchanged in a range of 1 percent to 1.25 percent at last month’s meeting in which it also revealed its plans to trim the massive holdings of treasuries and mortgage-backed securities which it accumulated after the 2008 financial crisis.

Key Announcements

09:30 – GBP – CPI y/y; Forecast at 3.0% against a previous of 2.9%

11:15 – GBP – BoE Governor Carney Speaks