Britain & EU Declare Brexit Breakthrough

Daily Analysis - 10/12/2017

Robust US Jobs Report Scuppers Breakout Pound Rally

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After almost 18 months since the Brexit vote, UK Prime Minister Theresa May announced on Friday that a breakthrough had been reached with the European Union on divorce negotiations. The Pound spiked on the news, only to give up most of those gains amidst a stronger than expected US jobs report that sent the dollar rallying.

Last Week


After falling short of arriving at a consensus last weekend, the UK and the European Union finally ironed out a deal that includes a financial settlement, protection of rights of EU citizens residing in Britain, and assurances that no hard border would be erected between Northern Ireland and the Irish Republic. With EU demands met, talks will now move on to drawing up a future trade framework. On the economic data front, US Nonfarm Payrolls grew by a better-than-expected 228,000 in November, while the jobless rate remained unchanged at 4.10%. Average hourly earnings edged 0.20% higher last month after contracting by a revised 0.10% in October.

The solid jobs growth cemented expectations that the Federal Reserve will hike interest rates for the third time this year when it meets next Wednesday. On the political front, Germany’s centre-left Social Democratic Party re-elected Martin Schulz as its chairman on Thursday and sanctioned him to open talks with Angela Merkel’s conservatives on the formation of a new coalition government almost three months after the general election. In Asia, the International Monetary Fund warned China this week that it debt-fuelled economic model had reached its limits. The IMF stress-tested 33 major Chinese banks and found substantial weaknesses outside of the big four, potentially adding to financial risks and weighing on economic growth.

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The Week Ahead


Three heavyweight Central Banks are slated to meet next week to decide on interest rates, but only the US Federal Reserve is expected to adjust monetary policy when the FOMC convenes for a meeting on Wednesday. Financial markets have fully priced in a quarter-point raise, which would increase the Federal Funds rate target band to 1.25% - 1.50%. The Bank of England and the European Central Bank are both projected to maintain rates for the foreseeable future. Investors will keep a close eye on the Fed’s “dot plot” to seek clues about the number of rate increases the Central Bank is likely to implement in 2018.

Market participants are currently anticipating the Fed will undertake three interest rate hikes next year. On the US political landscape, lawmakers’ efforts on tax reform will again be in the spotlight. Senate Republicans had agreed last week to initiate discussions with the House of Representatives to reconcile their respective versions of the tax bill, with December 22nd looming as a self-imposed deadline. From China, November industrial output, urban investment and retail sales data is due on Thursday, with the annual rate of growth for the former two gauges forecast to marginally ease, despite maintaining an expansionary pace. Retail sales are projected to grow by 10.20% on an annualized basis.

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