The UK agrees to another lopsided EU deal – 20th March 2018

The UK agrees to another lopsided EU deal – 20th March 2018

Sterling broke through the major resistance level at £/$1.40 against the US Dollar yesterday as the UK and EU confirmed an agreement has been reached over the terms of the transition period following the UK’s departure from the EU in March next year. It would appear that compromises have been made on both sides but, just like in December last year, the UK has given up far more ground than the EU.

Under the terms of the transition agreement, the UK will continue to pay into the EU budget until December 2020 and will have to abide by EU rules but will have no say in new rules that are agreed. This lopsided agreement was well received by the market which drove Sterling higher and through long-term resistance levels. It reached a high of £/$ 1.4089 versus the US Dollar and closed at £/$ 1.4024.

Inflation data will be released later today with most analysts expecting the headline to have fallen to 2.8% which may produce a less hawkish statement from the MPC which meets on Thursday.

In Europe, there is growing speculation growing that the ECB is considering the withdrawal of the Asset Purchase Scheme and tightening monetary policy in mid-2019. A report from Reuters suggested that there is already discussion about the trajectory of interest rate rises once the first hike takes place. Given the expectations for inflation in the region and how benign price rises have been it is unlikely that there will be a “rush to normalisation” similar to what is happening in the US.

Despite Reuters contradicting the comments of ECB President Mario Draghi last week when he said that monetary policy would remain “patient persistent and prudent”, the Euro reached €/$ 1.2359 against the US Dollar but lost ground to Sterling as it reached a high of £/€ 1.1435.

It is a well-known trait of the FX market that traders “buy the rumour and sell the fact”. Roughly translated into the currency market movements it means that it is probable that the US Dollar will lose ground following the almost certain announcement of a rate hike from the Federal Reserve this week. Jay Powell, the newly appointed Fed Chair, will attend his first post-meeting press conference and a lot will depend on his words as there will be speculation about just how comfortable he will be trusting models and speculation about the future path of inflation and therefore interest rates.

 



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