Morning Report: 29 November 2017

November 29, 2017

GBP Sterling was trading down yesterday, before news emerged in the evening that Britain and the EU have reached a preliminary agreement on the Brexit divorce bill, previously a sticking point in negotiations. The news, if confirmed, would represent a significant milestone in Brexit negotiations, which could then proceed to substantive matters of trade and a transitional agreement. The question of the Irish border remains a stumbling block, as does the stability of Theresa May’s Government, which may struggle to find enough internal political support for the concessions. Last night’s price action also shows the extent to which headline risk remains a factor for sterling – any setbacks or near collapses in talks are likely to be felt just as keenly as last night’s good news.

EUR The euro sold off to both GBP and USD yesterday, although for different reasons, with USD well bid due to progress in tax reforms and sterling rallying last night on political news. Yesterday’s data included an on-expectations print for German GfK Consumer Climate. This morning’s data has included a surprise contraction in monthly French Consumer Spending, which fell 1.9% in October, and a miss for Spanish Consumer Price Index inflation, which rose by 1.6% year on year, unchanged from last month and below expectations.

USD USD performed well in a broad sense yesterday, with the weighted USD index DXY rising as tax reform legislation continued to make slow progress, ahead of a vote as early as tomorrow. The Senate budget committee yesterday voted to send the Republican tax bill to the floor for a vote, in a sign of building momentum for the bill. The majority of economist opinion remains united in concluding the long term effect of the bill on growth will not be a game changer for the economy, but the legislative progress may nonetheless be taken as a positive for the dollar. Incoming Federal Reserve Chair Jerome Powell testified on his nomination yesterday, and was utterly true to form, steering well clear of fiscal policy, cautiously hawkish on rates, and advocating a light regulatory approach. Today at 13:30 GMT revised Gross Domestic Product growth data will be released, and at 15:00 outgoing Fed Chair Janet Yellen will testify to lawmakers.

CAD The loonie remained on the back foot yesterday, weakening amid the release of the Bank of Canada’s latest Financial System Review. BoC Governor Stephen Poloz, speaking after the release of the report, emphasised elevated risk in the housing sector, while also saying that it was too early to judge how the Bank’s two rate hikes had affected the economy as a whole. Rising household indebtedness was highlighted as “the most important vulnerability to the financial system”, although Poloz did also express optimism that higher wages would offset the effects of BoC hikes. News from this week’s OPEC meeting is expected today, potentially confirming the extension of the current OPEC supply restrictions, offering a boost to crude oil prices and potentially some support for the loonie.

UK news

  • Guardian: Paying Brexit bill is Britain’s obligation to EU, says Grayling. The reported financial settlement the UK is set to pay on leaving the European Union would be “meeting the obligations we’ve built up, no more or less than that”, one of the cabinet’s leading Brexiters has said.
  • Sun: FINAL COUNTDOWN Brexit divorce bill amount – how much will leaving the EU cost UK taxpayers?. Theresa May has tabled a whopping offer to the EU in a bid to move talks forward and start negotiating a future trade deal, European sources have said. The deal is set to be formally offered to Jean-Claude Juncker when the PM meets him on December 4.

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