Brexit negotiations had a rollercoaster few days last week. PM May met with EU’s Juncker on Monday looking for agreement to move Brexit negotiations on to the next stage and start trade and transitional phase discussions. That attempt stalled due to the lack of agreement on the border between the UK and Ireland. Disappointment set in but on Friday a deal was agreed. The UK also saw better manufacturing output but weak construction output figures for October. All in all the Pound remained within its recent range against the US Dollar and Euro.

The passage by the US Senate of its version of the tax bill last weekend set the scene for a week of optimism about the outlook for the US economy, which helped the US dollar. Friday’s US employment report generated a strong 228,000 increase in employment in November, keeping the unemployment rate at 4.1%, but average hourly wage growth remains subdued, at 2.5% YoY.

The day ahead

We have a busy week ahead of central bank meetings and the post-Brexit divorce agreement European Council meeting at the end of the week. The FOMC rate hike is pretty much nailed on for this Wednesday. The meeting will also mark Chair Yellen’s last press conference. The European Council meeting scheduled for Thursday and Friday should shed some light on whether we will get a transitional deal for the UK and if so how quickly and will there be any further conditions. On Thursday we have the ECB’s policy announcement due. It’s worth keeping an eye on President Draghi’s press conference and particularly if he addresses some of the internal divisions on the Governing Council, which might provide further clues on the policy outlook ahead and in particular the likelihood of the ECB bringing its QE buying to an end in September 2018. The ECB will also publishes its first forecasts for 2020 GDP growth. We also have a Bank of England meeting on Thursday, which is likely to be the least eventful of the three meetings. The main possible discussion could be on what the recent Brexit breakthrough might mean for policy going forward, which could lead to Sterling volatility. 

Thought of the day

Famous Scottish Economist and author of ‘The Wealth of Nations’, Adam Smith was once quoted saying ‘All money is a matter of belief’. Fridays morning’s progress was the completion of a deal which we all thought was nailed down on Monday, until the DUP offered an eleventh hour objection. The difference was the same deal on Monday barely caused any market reaction at all and on Friday at the second attempt the market rallied significantly. The move goes to shows what we can expect with every twist the Brexit tale takes through 2018 we can expect significant volatility and a lot of that can rely on the markets perception of situations. If you would like to talk through the potential currency risks your business faces in 2018 please call the Investec Dealing Desk on 0800 055 6339.