Published On: Mon, Jun 19th, 2017

Brexit talks begin – GBP/USD weakens as UK and EU set out opening positions


UK Secretary of State for Exiting the European Union David Davis has met with European Commission Chief Negotiator Michael Barnier to set out their opening positions.

Although the start of the talks at least marks the end of one point of uncertainty, the UK’s fraught political situation is creating significant confusion; markets are still hoping that this will result in the government opting for a softer approach to , however.

Investors are also busy picking apart the history of the latest Bank of England (BoE) Monetary Policy Committee (MPC) member Professor Silvana Tenreyro of the London School of Economics.

Tenreyro replaces Kristin Forbes, a notable hawk who has voted in favour of raising interest rates for several meetings now, so investors are keen to find clues that will indicate if Tenreyro is likely to also push for monetary tightening.

Nomura’s Jordan Rochester believes that Tenreyro is likely to be dovish at least to begin with, explaining; “Relative to the hawkish person she is replacing (Forbes) and the view that new members do not usually jump straight into a bias, we would assume a slight swing to a more dovish vote”.

Tenreyro could very well support the majority of the MPC in claiming that there is a need to look through inflation in order to assess the economic impact of borrowing costs on the wider economy.

She was one of 280 economists who signed a letter which was published in the Times before the referendum, calling Brexit a “major mistake”.

She reported in the Financial Times Christmas survey that she believed Brexit would “have a negative impact on the UK economy and Europe more generally”.

Markets are also slightly unsettled by comments Tenreyro made two years ago in favour of reforming the financial system to allow negative interest rates.

Meanwhile, the US dollar is being kept soft by the fact that the week will see a slew of speeches from Federal Reserve officials, with Charles Evans, Stanley Fischer, Eric Rosengren and Robert Kaplan all scheduled to speak at separate events tomorrow.

Towards the end of the week Jerome Powell, James Bullard and Loretta Mester will also speak.

The markets currently aren’t convinced that there will be another round of monetary tightening from the Federal Open Market Committee (FOMC) this year, with futures contracts putting the odds of borrowing costs remaining at 1.25 per cent at 54.4 per cent.

This could change after tomorrow’s speeches however, if policymakers demonstrate more confidence than previously; it is the potential for a sharp repricing of hike odds that is keeping the US dollar on muted form today.

BoE Governor Mark Carney was due to give a speech at the Mansion House event in London last week; this was cancelled out of respect to the victims of the Grenfell Tower disaster, but the text of that speech is being released tomorrow.

This could cause additional volatility for the  if the Governor seems determined to continue with his policy of ignoring soaring inflation figures.



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