Yesterday, the first draft of the Brexit Treaty, a 118-page document that basically drafts into law what EU believe has been agreed thus far, was published. According to the first draft, Northern Ireland will form a “common regulatory area” with the Republic of Ireland and therefore remain in a customs union with the EU to avoid a ‘hard border’ between Northern Ireland and the Republic. This is the treaty’s proposed fall-back position if a free trade agreement is not reached.

This poses a few problems for Mrs May - firstly it goes further to tying Northern Ireland to EU market rules, something Mrs May did not believe was agreed in December’s Brexit talks. Secondly, she’s made promises to the hard-line Brexit supporters in her own party that the entire UK will leave the EU’s customs union. Also, this proposal is profoundly at odds with the position of the Democratic Unionist Party (DUP), who are currently propping up May’s minority government.

If that wasn't bad enough, the draft treaty is also seen to be ignoring the UK’s demands for a longer transition period. EU Chief negotiator Michel Barnier went as far as repeating his warning that a Brexit transition period for the UK was in fact not a given. He continued to play hardball saying “there are no guarantees on the full access to the single market throughout the transition period if any obligations are violated”.

Theresa May's riposte was swift and bold - she vowed that no Prime Minister would ever accept the draft Brexit agreement saying the plan would undermine the integrity of the British economy and constitution. Mrs May was not the only one angered by the draft, DUP Leader Arlene Foster had her say too saying its “constitutionally unacceptable and would be economically catastrophic for Northern Ireland”.

Pro-EU Conservatives, however, would have been encouraged by Barnier’s comments that keeping the whole of the UK in a customs union with the bloc would go a long way to solving the problem of the Irish Border. I am sure Mr Corbyn would agree too. So everything is set now for Theresa May’s Friday Brexit speech, in which she is due to spell out her own vision for the future trading partnership. Given the competing demands from her party and the DUP that the Prime Minister has to juggle, it will be one very interesting Friday.

In other news, the second estimate of US Q4 GDP came in in line with expectations at 2.5%, US pending home sales undershot significantly printing -4.7% against a 0.3% consensus. This did little to hurt GBPUSD moving lower, however.

The day ahead

The day ahead is pretty action-packed. Manufacturing PMIs will be released across the UK, EU and US. At 15.00 Jerome Powell, the new US Federal Reserve chairman, testifies before the Senate Banking Committee. After his hawkish testimony to the House Financial Services Committee on Tuesday, it seems the central bank is steering market expectations towards more than the three interest rate hikes envisaged in the December “dot plot”. Many economists, including our own, are now forecasting four hikes this year. 

Thought of the day

It seems that Michel Barnier is taking cues from the ‘Beast from the East’ after a chilling statement yesterday in which he warned that a Brexit transition period is far from guaranteed. The week does not seem to be getting any easier for the pound (or even commuters!) ahead of UK manufacturing numbers this morning before Theresa May’s all-important speech on Friday. All the while, the pound has slipped from recent highs as markets wait for further developments. Before the Pound can bask in the glorious spring sunshine, it will have to weather the storms that could lie ahead. If your FX planning or travel plans have suffered a hit in recent days, your Investec dealer will most certainly give you a warmer reception than Mr Barnier and give you some pointers on how to rejuvenate your FX policy during this uncertain period.