05/11/2018 - Brexit Deal at 50/50

GBP

Sterling gained on Friday, putting it on course for its second best week of 2018 on optimism for a Brexit deal and signals from the Bank of England that if the exit from the European Union is smooth more interest rate hikes could be on the way.

Any agreement with Brussels would then need to win approval from British parliamentarians before the Brexit date of March 29, a far from easy process given factions with Prime Minister Theresa May’s Conservative party oppose her plans.

The chances of Theresa May striking a deal with Brussels on the Irish border that she can sell to the cabinet and parliament are said by EU officials to be “50-50” as the tense talks enter their final stretch.

One Whitehall source said, should sufficient ground be made in the coming days, a tentative new date of 22 November is being floated for a meeting of the EU’s heads of state and government. Downing Street has insisted it does not have a deal ready for signoff, in response to reports over the weekend of there being an agreement in the making.

The commission has accepted that an all-UK customs union could be referenced and prioritised in the agreement, with a separate treaty, negotiated during the transition period, filling out the details.

An EU official suggested that such a UK-wide customs deal could only replace the Northern Ireland-specific text if it was a permanent arrangement, and even then there would serious legal issues with making such a commitment at this stage.

USD

The dollar held steady against most of its major peers on Monday, supported by expectations of tighter U.S. monetary policy, while sterling gave up nearly all its recent gains as investors sought clarity around Brexit.

Analysts are bullish on the greenback, supported by strong economic growth and see the Federal Reserve on track to raise interest rates in December, followed by another two hikes by mid-2019.

Data out on Friday showed that U.S. jobs growth rebounded sharply in October and wages recorded their largest annual gain in 9-1/2 years.

Key Announcements

09.30 – GBP: Services PMI; Forecast at 53.4 against previous of 53.9
15.00 – USD: ISM Non-Manufacturing PMI; Forecast at 59.3 against previous of 61.6