Politics to Eclipse Economics at the start of the Week

Politics look set to drive trading on both sides of the Atlantic eclipsing economics as the new week kicks off and potentially making for a volatile start. 

May to put Brexit offer on the table in Brussels 

Theresa May heads to Brussels to meet with President of the European Commission, Jean Claude-Juncker and EU Chief negotiator Michel Barnier. Today and over the course of the coming days the UK government will need to convince EU officials that “sufficient progress” has been made on the three key topics that the EU had identified as needing prior consideration, before moving forward to discuss the possible trade and transition deals.  

There have been conflicting reports across the weekend as to whether the UK and EU could be on the brink of sealing a Brexit divorce deal. Theresa May is reportedly heading to the meeting with potential solutions to two of the most sensitive political issues, the Irish border and EU citizen rights. However, the Irish border issue remains fluid and changes could still be on the cards until the last minute, meaning pound traders could be in for an intense morning session. 

Momentum & optimism to carry the pound higher? 

Sterling traders are standing ready, should Theresa May be able to offer Brussels a deal that could cement a move forward to trade deal discussions. Last week the pound rallied 2% versus the dollar on Brexit optimism, reaching a two-month high $1.3549. This represents an almost 13% increase since the pound’s nadir at the beginning of the year. Should the right sounds come from the meeting today, we could see momentum carry the pound towards $1.40. 

Any signs of Brexit talks progressing would start to put to bed fears over a hard Brexit and no trade deal. Although key factors could be lining up for sterling, pound traders are equally poised to sell out should there be the slightest sniff that talks will not move forward. Also causing a potential headache for May and sterling alike, could be Brexit hardliners who are uneasy with the deal that May is pointing towards. 

What happens next? After Theresa May’s offer, EU officials will have 10 days to consider it before a crucial EU summit on 15th December. Between now and headlines will continue to drive the pound. For now, the pound remains on a healthy uptrend, despite the stronger dollar. 

US dollar & futures have a flying start as Senate approve tax reform bill  

The dollar has kicked the week off on the front foot, celebrating the Senate approving their version of the tax bill. Whilst Special Counsel Mueller’s inquiry into Russian links with Trump’s Presidential campaign appears to be gathering speed, relief over false reports over ex-aide Michael Flynn on Friday is offering some support to the buck; leaving investors to cheers the increasingly likely prospect of the tax reform bill making its way to Trump’s desk for signing before the end of the year.  

Unless we hear fresh headlines concerning the Russia probe at the beginning of the week, investors are going to want to move on as quickly as possible, especially given the number of potentially dollar boosting events coming up. Even if there is some dollar weakness come midweek, we would expect this to dissipate moving towards Friday, in the hope of a strong labour market report.  

US futures gapped heavily on the open on Sunday evening as the 15% corporate tax cut promises to boost the bottom line of many listed stocks. Time is ticking, and Congress still has to reconcile the House and Senate bill, however the market clearly wants to believe that this is going to happen. Santa’s rally may even start a little earlier this year.