Tag Archives: Charles Porter foreign exchange

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Morning Brief – Eurovision

Eurovision

 

Resistance, support, reversal and jargon. Is pretty much what you’ll receive if you try and research the Euro’s sell-off since December 2019. If you try and read a forecast about what is going to happen to the Euro from here you’ll find even more nonsense. Here’s the truth of the matter:

 

The Euro yesterday evening hit its lowest value versus the US Dollar since 2017 and its weakest level versus the Swiss Franc since 2016. Although only a two (and a bit) and three (and a bit) year high respectively, the surge is important because the 2017 low on EURUSD is close to the all-time low and sufficiently weak to start discussions about parity: 1 Euro equals 1 USD and vice-versa. The immediate path of EURUSD should be uncertain. The reason is that the market has traded and turned at the price it is at today so many times that so many interests and expectations have built up around these levels. Accordingly, traded volumes should be elevated as market participants position themselves around what they think could be the next turning point.

 

There are three factors for the Euro’s weakness. The first two, economic in nature, are the Euro’s role in markets today and, secondly, the bloc’s economic fundamentals. With bafflingly low rates and thus yields the Euro has taken on the role of the funding currency. This means it’s the one you’re going to sell when you’re looking to buying something else to pick up a bit of real yield and interest. Sure, to take profit you’ll have to buy Euros back eventually but with futures markets telling us that interest rate expectations are still pointing towards a cut this year, it could be an incredibly long time until you have to buy them back.

 

Secondly, with industrial activity waning in Germany and the wider Eurozone, the threat of the coronavirus to global demand for Eurozone exports is undermining growth expectations further. Overnight the new cases of coronavirus have registered at 14,800 in a single day. It’s too early to tell whether the change in counting methodology is to blame or the reinvigoration of risk appetite yesterday driven by expectations of peak virus transmission were misplaced.

 

The final threat pushing the Euro lower is political. With the resignation of CDU leader Annegret Kramp-Karrenbauer announced this week, the successor to Chancellor Angela Merkel is now uncertain. In addition the development of the far-right in German politics is undermining the perception of German political economic stability.

 

To reflect Euro fragility, JP Morgan, RBC and Credit Agricole have immediately downgraded their forecasts for the Euro. The median forecast for 2020 year-end amongst analysts when last observed was 1.14, pie in the sky territory from where Europe opens trade this morning. The market will provide interesting enough conditions on its own at this all too familiar level but external stimulus will come from Germany tomorrow morning as we learn more about Q4 growth in the EU’s largest economy. The median forecast is for a 0.1% quarterly expansion. But approximately 30% of analysts surveyed predict a contraction for Q4. The release is scheduled for 7AM tomorrow morning. If the statistics realise a contraction then recession expectations will be back in full focus and the Euro will sink lower.

 

 

 

Discussion and Analysis by Charles Porter

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UK buildings

Morning Brief – Oh that’s where I left it!

Oh that’s where I left it!

 

It takes a big lens to capture a clear image of a piece of paper from tens of metres away. But in most of those circumstances what takes far more skill and consideration is the hand placement, angle and speed of travel to ensure the photographer achieves the seemingly accidental photograph. Journalists would be forgiven for thinking Sajid Javid, UK Chancellor and inhabitant of no. 11 Downing Street, had taken up moonwalking practicing his daring performance.

 

A briefing paper carried into no. 10, the Prime Minister’s residence, and captured in Downing Street purports to show the UK government’s stance on Financial Services in a post-transition trade deal. It’s no Canada style and is the antithesis of Johnson’s so-called ‘Australia-style’ – whatever that is – deal. Instead it shows that the government is aiming to create the first ‘permanent equivalence’ regime outside of the Union. Awesome. But what does that mean?

 

Nations outside the Union can have the right to operate within the Union’s boundary if they are deemed to have achieved equivalence. Equivalence means that the ‘3rd country’, the outside party, has legislation and regulation deemed to be equivalent to EU rules and therefore not undermine the integrity and competitiveness of the bloc. However, as we were reminded of with Switzerland last year, equivalence can be ripped away from 3rd countries like the UK with virtually no warning. In some circumstances financial services are afforded a grace period of 30 days to sort their affairs out – a woefully insufficient period of time if you’re a hefty financial services provider who’s just been told their European client and product bases are now off limits.

 

The financial services sector is not only responsible for 7% of value added in the UK each year and just shy of 4% of the UK’s labour force, it is also a source of comparative, and in some cases absolute, advantage for the nation. That means the UK is strongly advantaged by trade in that service at the very least, and at most has a world-leading provision and efficiency in the service. The deliberately accidental leak that financial services are receiving explicit attention within the negotiations should reassure markets slightly. The news has offered little confidence to Sterling traders this morning as the Pound trades in line with its average value yesterday, just shy of a 2.5 month low for the Pound versus the US Dollar.

 

The lack of optimism in this phase of negotiations reflects the reality that just because a deeper trade deal than Johnson and Javid have espoused in recent weeks might actually be on the cards, it doesn’t mean the UK will be able to prise the deal from the mouth of EU negotiators. For example, developments in the political landscape of Ireland, a nation that joined the-now European Union at the same time as the United Kingdom, might cast doubt on the willingness of the EU Council to grant the UK a generous post-transition deal.

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Goodbye and good riddance!

Goodbye and good riddance!

 

If you hadn’t noticed, the United Kingdom has left the European Union. You could be forgiven for not having noticed because by design of the Withdrawal Agreement, nothing changes until the transition period is concluded. However, at the formal and legal level the departure has taken place: the UK’s flag has been ceremoniously removed from the European Council’s lobby; remainers have either found inner content, are now remourning or have become rejoiners. If nothing else yet Brexit has certainly developed the nation’s skill with the portmanteau… confined to the universe of ‘motel’ and ‘brunch’ we are no more! Although technically Grexit came first if you recall.

 

The final official words from the European Union to the UK as a member state might surprise you. Coming from the chair of an official meeting between member states a couple of days before the UK’s exit, the Croatian Ambassador (holding the 6-month rotating presidency) concluded the final engagement by fondly saying to the UK, ‘thank you, goodbye and good riddance’! The UK ambassador reportedly took the somewhat insulting conclusion of a 47 year long relationship in good spirits receiving reassurance the parting message was lost in translation and intended to mean good luck. Keep that excuse up your sleeve next time you’re caught whispering something under your breath perhaps!

 

Sterling tumbled to a six-week low versus the US Dollar yesterday as Johnson set out his position for trade deal negotiations. The Prime Minister called for a Canada-style trade deal to be constructed between the UK and the EU. The market was spooked by Johnson’s threat to walk away from negotiations if the EU insisted that the UK must be bound to the Union’s rules and concern built around what Johnson called an Australia-style trade deal. If you were wondering, Australia does not have a trade deal with the European Union. They have been in talks since May last year attempting to construct one and in the absence of progress on this endeavour they trade with each other based upon the 2008 EU-Australian Partnership Framework. This framework aims to boost trade by reducing technical barriers to trade but is fundamentally WTO trade with a touch of respect.

 

We should expect a tough line from Johnson at the start of negotiations in order to improve the prospect of the final trade deal. Nonetheless, the market braced yesterday and this morning by selling the Pound to react to unfolding events. Cable lost more than 2 cents yesterday from the price it opened at in Wellington, New Zealand to its close in London. The low we now sit on versus the Dollar is an important technical level. We have traded below this level at the end of November and subsequently touched this price floor four times in the two months of trading that followed. If this level is broken then ground opens up for the Pound to fall all the way to 1.20, the low reached in August 2019. Even if there is a retracement in the Pound in the short term, yesterday is a sign of the volatility to come during these negotiations.

 

 

 

Discussion and Analysis by Charles Porter

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Skyscraper view

Morning Brief – Baaaaad news

Baaaaad news

 

If you’re planning on taking on the pub quiz any time soon it may be worth keeping this one in mind. Not the traditional victim of sheep observations, it is in fact Australia that is the world’s leading exporter of lamb and mutton. Towering above New Zealand and Wales, Australia in 2018 exported a whopping 2.6 billion US Dollars of lamb and mutton and accounted for 7% of agricultural production. Exports in agricultural produce have fallen in the last half century from just over 60% of total exports by value to marginally over 10%. However, having realised a fragile current account surplus of 7.85 billion AUD in Q3 2019 and deficits throughout 2016/17, the trade in lamb and mutton cannot be considered negligible to economic performance. With the wild fires destroying acre upon acre of arable land, concerns surrounding Australia’s agricultural exports are mounting.

 

The economic risks to Australia and thus the Australian Dollar sadly do not even end with the devastating wild fires. In the same time as Australia’s reliance upon agricultural exports has shrunk by 50%, so too has its exposure to Chinese importation swelled from 2% to 27% over the same period. The Coronavirus crisis in China has seen flights into the nation suspended from many countries and expectations of a slowdown in consumer spending and economic performance gather speed. Australia is therefore facing risks across the breadth of its exports rather than having to deal with the specific threat to agriculture.

 

As the health crisis has unfolded the prices of non-precious commodities has tumbled. Crude oil, a good barometer of economic expectations so long as conditions of supply can be assumed to be stable, has tumbled by as much as 10 US Dollars per barrel throughout the crisis so far. The same is true in metal and ore prices, the underlying commodities of which account for more than 50% of Australia’s total exports.

 

Aside from risks derived from the wildfires in Australia and the Coronavirus outbreak, economic fundamentals are also not on the side of the Aussie Dollar. Despite inflation picking up at the start of the year following its 2019 slump, the Reserve Bank of Australia is not looking raise rates any time soon and yesterday only signalled a delay to further monetary easing. Markets still price in a 20% chance of a 25 basis point cut at the Bank’s next meeting in February. The tripartite problems to the Aussie’s value show no sign of abating and it seems likely we get a re-test of December’s GBPAUD low. If this resistance is taken out in the coming weeks there is headroom towards GBPAUD 1:2. Against the US Dollar, the Australian Dollar could reasonably print at its worse value since 2009 within weeks.

 

The Bank of England will present its latest monetary policy decision today. The market still prices a 50% chance of a cut in futures markets as all eyes will be on Carney’s last Monetary Policy Committee meeting before the Governorship changes hands. The interest rate decision today comes the day before the UK leaves the European Union and embarks upon its transition period. The Withdrawal Bill has passed through the Lords paving the way for a smooth transition tomorrow but as focus turns to trade negotiations there will be episodes of extremely choppy trading in the months ahead.

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – No small issue

No small issue

 

Buyers of Rand have enjoyed the sell-off in the South African currency so far this year. Sellers on the other hand have displayed concern throughout the market as the South African economy embarks upon quite the first quarter of the decade. This shift in sentiment has been responsible for the change in price so far this year with the Rand yesterday trading at the cheapest level so far this year against both the Pound and US Dollar yesterday afternoon. The problem you might rightly suspect begins with Eskom, but it doesn’t end with the state-owner utility company.

 

The sell-off in the Rand in the past week or so is most likely the effect of position adjustment as we move towards the draft Eskom solution this week, budget speech next month (26th February), and Moody’s credit rating in the first week of March. Last week we learned the likely cost of load shedding in 2019. Estimated by the Council for Scientific and Industrial research at as high as R118 billion last year, the lights were switched off for a cumulative planned 530 hours in 2019. If that figure is correct it means that the single issue created by the failure of the state utility and its management is alone responsible for a puncture approximately 2.5% of the size of the entire economy. The cost per capita of Eskom’s failings last year alone therefore is over two thousand Rand. And what did each citizen get for their R2,000 bill? Less than nothing! Growth forecasts for South Africa are weak and if load shedding were to take place at a rate akin to 2015 this year, they could well turn negative plunging the economy into its second recession since 2018.

 

In accordance with President Cyril Ramaphosa’s announcement last year, we had expected Eskom’s CEO Andre de Ruyter to announce his plan to split up the energy provider into three separate legal entities each responsible for generation, transmission and distribution respectively. On Sunday, he cautioned against rushing the division of responsibilities announcing his concern that a sudden separation could provoke lenders to constrain credit and cash even faster. The market sensed division between political and executive leadership in South Africa and, fearing another potential delay to the emergence of a holistic plan, sold the domestic currency.

 

Finance Minister Tito Mboweni will deliver his budget speech to the nation with the world watching in one months’ time. The cash allocated and commitments made to the provider responsible for 90% of South Africa’s energy provision will set the stage for Moody’s ratings agency to decide once again if domestic debt is worthy of an ‘investment grade’ stamp or should be classed rather fondly as ‘junk’.

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Who are you?

Who are you?

 

0.7% in one day is a pretty decent rally for the Pound. Sterling currently sits at 2 week highs against the US Dollar and yesterday GBP reached 2020 highs against the Euro. But what brought us here might surprise you: Confederation of British Industry survey data! This piece of soft data is normally not considered a market moving piece of information. However, yesterday’s fragile market conditions and Sterling traders’ agitation ahead of next week’s Bank of England decision and formal exit from the Union allowed it to become salient information.

 

Headline data at the beginning of the year and rhetoric from the Bank pointed to the need for a cut in rates. Subsequently, soft data releases have shown evidence of a pick up in activity and confidence following December’s general election – a period not yet observed by more concrete headline economic data. The CBI data release was startling. It showed that overall business optimism had strengthened sharply to record a figure of 23 in the 3 months to January versus -44 the previous quarter.

 

A reading of 23 is the healthiest observation of business confidence that the CBI has recorded since April 2014 and analysis reveals that it is the sharpest quarterly gain for over 60 years. The composition of the data showed that optimism was broad based and shared by businesses affected by the exportation capacity of the UK. The CBI data is (at least) the 4th such indication of an observable economic boost granted by the 2019 general election and with the interest rate decision exactly 1 week away for the Bank of England, the data was enough to cast doubt over what was previously priced as a confident cut in rates. Money markets immediately moved to slash the discount priced into Gilt Futures to leave only a 50% probability priced in of a Jan 30th cut.

 

Today it is the turn of the European Central Bank to offer markets its latest interest rate decision. All three barometers of the price of Eurozone money (their interest rates) are expected to remain the same with no new commitments to outright monetary transactions Quantitative Easing. What President Lagarde is expected to do is offer more insight into the Bank’s Strategy Review. The Review could look into everything including the inflation target and monetary policy instruments. As with any systemic economic shakeup there is the potential for volatility. With the Euro at 2020 lows and political headlines in Italy dragging the single currency lower yesterday, Lagarde’s Review could even cause markets to re-view 2019 EURUSD lows.

 

 

 

Discussion and Analysis by Charles Porter

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EU banner

Morning Brief – How Low Can Ya Go?!

How Low Can Ya Go?!

 

Despite its relative adolescence on the global stage the Euro is a big player. Largely due to its incompleteness it hasn’t achieved the status of a reserve currency and doesn’t play a huge role as an underwriter of trade in goods and services outside of its own member states and continent. Whilst spewing out headlines on a daily basis given the number of hard and soft data releases what with 19 sovereign members, the Euro never seems to move very much. This isn’t just due to the thirteen trillion Euros in its monetary system making it big and lethargic to move it’s also down to the immense liquidity that has been provided by the European Central Bank and global monetary institutions that has subsumed and killed John Maynard Keynes’ animal spirits.

 

Today, with the Euro having sold off to its weakest level against the US Dollar so far this year, there are serious Euro discussions afoot. The pair has lost 1.2% versus the US Dollar so far this month meaning that US Dollars are now 1.3 cents more expensive than they were 13 trading sessions ago. With one-month implied volatility hovering around the 4% mark and 9 trading sessions to go in the month, the move is considerable.

 

This Thursday Christine Lagarde will present the ECB’s latest monetary policy decision. Far from a standard meeting, the European Monetary Authority is expected to launch a strategic review and rethink of its inflation goal. At the moment the ‘close but just below 2%’ ECB mandate looks like a distant memory. If this takes hold as a ceiling rather than a target in the expectations of the consumer and business then disinflation creeps further onto the cards. The move is dramatic and a poorly handled situation could bring further downside to the Euro.

 

To add to the gloomy international picture, yesterday the International Monetary Fund released its World Economic Outlook Update. If you look at the update that markets received in October last year and in April/July before that references to the trade war between the US and China were littered across each page. Alongside admonitions from the IMF about the threat that the trade war presents to the global economy were heavy handed cuts to global growth outlooks. The two were causal – the threat to Sino-US trade undermined global growth forecasts so severely it was a global systemic risk to growth.

 

I bemoaned last week of the insignificance of the phase 1 trade deal but make no mistake, no matter how loose-weave its enforcement and ambition it does still provide some assurances to bilateral trade. How then can a partial resolution of the rhetorical conflict be deserving of yet another 0.1 percentage point downward revision of 2019 and 2020’s growth expectations?! The IMF seems to be writing allegory to us – reading between the lines is definitely necessary. Their true message seems to be that a global recession is on the cards unless monetary authorities continue to do whatever it takes to stave one off. Get ready then for a weaker Euro and that count of the broad money base to push even higher from thirteen trillion.

 

 

 

Discussion and Analysis by Charles Porter

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UK buildings

Morning Brief – Signed, sealed, not delivered

Signed, sealed, not delivered

 

A trade deal is done between the US and China: call the IMF to tell them to change global growth forecasts; let emerging market currencies rally at the expense of overvalued safe-havens! Sadly not.

 

Whilst Trump didn’t give markets any last minute surprises by refusing to sign the document or kicking off that it was Vice Premier Liu He and not his counterpart General Secretary Xi that sighed the deal, the quiet in markets since its signing last night shows us the importance of the deal – low! There are two huge insufficiencies in the deal.

 

Firstly, the substance of the deal: at the core of the trade dispute and therefore phase 1 trade deal is agriculture. It is of particular importance to Trump because much of his voting base have already felt the impact of punitive tariffs on Chinese imports of such goods. The deal therefore pledges China to spend $32bn over the next two years on agricultural goods. That’s all well and good until we realise that on average last decade during the Obama years China spent $22bn annually on such goods anyway! Therefore the deal guarantees less trade than the free market had already facilitated. From this element and others, the conclusion is that the deal is so weak that it cannot be thought of as a resolution in any more concrete terms than a symbolic gesture.

 

Problem two: there’s no mechanism. The deal does not dictate how the underwhelming promises will be delivered leaving considerable doubt over whether the pledges made will translate into constructive trade. The lack of methodology also means we don’t even know whether China will lift extant tariffs on its importation of US exports including those on energy and soybeans (the largest historical component of US agricultural export to China). This exclusion cannot be considered an oversight, it must have been a deliberate redaction and likely one that is keeping tensions elevated between the two nations behind closed doors. With cloud surrounding the already insufficient deal, markets have not found the deal to be something to celebrate yet.

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Cheaper Rates – Cheaper Sterling

Cheaper Rates – Cheaper Sterling

 

At December’s monetary policy decision the Bank of England chose to hold interest rates steady at 0.75%. But the decision was not without dissent and division within the authority’s core, the Monetary Policy Committee. At this meeting two members, Haskell and Saunders echoed their previous dovish warnings that borrowing rates in the UK are too high given the state of growth and inflation in the economy.

 

On Friday, in another blow to GBP, Ms Tenreyro appeared to commute over to the intellectual space of the aforementioned members heeding caution to markets that in the absence of solid data to the contrary she could switch to a vote to cut the Bank Rate in the coming months. Over the weekend Mr Vlieghe, an often pivotal and certainly long standing member of the central bank’s Committee, reinforced Ms Tenreyro’s position as the bank’s new possible median opinion.

 

Sterling’s concern heading into the early European session yesterday was that the two opining members could join Haskell and Saunders leaving 4 votes to 5 in favour of cutting rates. Mr Carney will leave the Bank in March when incoming Andrew Bailey will take his place at the helm of the Committee. As the former CEO of the FCA, Bailey’s views on financial regulation are relatively well known in the marketplace. However, his views on monetary policy and future conduct of the Committee is relatively more opaque despite his three year stint as Deputy Governor of the Bank between 2013 and ‘16. Perhaps the one additional member of the 9-strong Committee needed to make a majority in favour of cutting rates would be found in the form of the Governor! Whomever it might be, markets moved to price in rate cuts in the coming months.

 

Traders’ willingness to flog Sterling yesterday morning began with these developments. The sell-off intensified when the market learned of data deserving of pessimism in the UK economy. The flash reading of UK GDP growth for November at -0.3% was enough to assume that the conditions for holding rates for Mr Vlieghe and Ms Tenreyro could not be met and therefore the reward for holding Sterling would duly tumble in forthcoming meetings, limiting its appeal, thus demand, thus value/price. The underwhelming data could be seen as evidence of uncertainty ahead of December’s General election. After all this trend has been reflected in soft data with business and consumer confidence stronger post-election.

 

However, remember of course this factor was already baked into forecasts for November’s economic growth. The possibility still remains that the effect was stronger than expected given the political turmoil the UK experienced last decade. Time will tell but two inalienable facts remain this morning: 1) strong growth will need to be recorded in December’s reading next month in order to prevent Q4 2019 from registering negative growth and questions of recession taking grip of Sterling markets. 2) The Pound is trading at its cheapest level versus its G10 counterparts so far this year making it considerably cheaper to purchase.

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Fun while it lasted

Fun while it lasted

 

The flight to safety and risk-off fire sale sparked by the events following the assassination order of Iranian General Soleimani seem to have been erased by markets as we open in Europe this morning. Cable (GBPUSD) trades almost exactly in line with where it did this time last week despite a high level assassination and 16 missiles being fired at coalition forces in Iraq from Iran. There have been two loops on the Iranian rollercoaster this week. The upswings in tension unsurprisingly occurred during the late night/early morning of Thursday/Friday the 2nd/3rd January during the assassination order from the White House and execution on the ground. The second upswing was caused by the ultimately underwhelming Iranian response on Tuesday night.

 

The retaliation was not the eye for an eye that the market had braced for. Can we consider the death of Iran’s General, widely regarded as second in command, for no deaths at a military base in Iraq as equal? Perhaps the lines of communication via the back door of Switzerland that took place this week allowed tensions to cool in an off the record diplomatic effort. Because the tasting of the pudding did not contain the proof (yet) of the expectations that the market had priced in, risk assets lost their ground once again. The riskier currencies used to finance their acquisition (ZAR, INR and GBP to name but a few were simultaneously reacquired). The same was true earlier this week when the weekend and Monday passed with nothing but rhetoric from official and unofficial sources in Iran. The two downward passages of our loop-the-loops and those which have on two occasions wiped out any price determined evidence of any geopolitical instability are evidence of the market believing that the all-out war they initially feared was increasingly unlikely.

 

With the passing of Trump’s more diplomatic (read teleprompted) speech yesterday afternoon UK time, the market now believes the flare up in conflict is largely over. Economic sanctions will instead be the soft weapon of choice for the White House with Congress also making moves to preclude some future unilateral actions by the White House. As markets and the world breathe a slight sigh of relief, let’s not forget that the arduous sanctions on Iran have been a significant contributor to the realised acts of aggression. With the nuclear accord (officially the catchily named Joint Comprehensive Plan of Action) still in disarray, the problem of Iran is far from solved. At most we can suggest that, for now, markets can turn to other things to motivate price action.

 

In the UK yesterday Ursula von der Leyen spoke at the London School of Economics before meeting with the Prime Minister. Her speech, delivered to a room of students crowded by a small army of tv cameras and journalists, did not scorn the British government away from its endeavours for a deal come December 31st 2020. Instead it contained pragmatic admonitions to the negotiating teams and government to prioritise what elements of a trade accord they wish to achieve in such limited time. Cards are still very close to Brussels’ chest with the Commission President revealing nothing in LSE’s ‘Old Building’ that we didn’t already know. Hopefully behind the doors of Number 10 Johnson received better and more meaningful guidance of Brussels’ red lines.

 

Along with the lack of new information and pessimistic tone the Pound drifted lower. Trade in goods always took the front end of the President’s sentences and at each opportunity doubt was cast over the propensity to create as deep a services deal as that for trade in goods. We leave the European Union in 22 days and future global, as well as European, trade deals will soon dominate the focus of Sterling traders.

 

 

 

Discussion and Analysis by Charles Porter

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