Pound wavers on Brexit milestone
A Brexit deal is on the table, but will it pass this afternoon’s Cabinet meeting? The cable is currently trading sideways, meaning traders don’t know: we expect GBP/USD to head along 1.2840.
Under the proposed deal, the UK would remain within European Union rules for the environment, state aid, employment law and competition. Is that really Brexit? Well, at least the UK would not pay EU member contributions anymore. So, it is highly likely that Brexiteers will oppose this particular deal, which would turn out GBP-negative. If the deal manages to pass, a special European Council meeting would take place on 25 November to ratify. For now, we assume that the UK (along with Northern Ireland) will remain in the common market and that the end-November 2020 deadline should be the next deadline to look after March 2019, when the UK will leave the EU – with or without a deal.
Italy dampens Euro
Despite warnings from the European Commission, Italy’s government is sticking to its proposed budget – which sports a deficit of 2.40% of GDP, i.e. USD 50-80 billion. If the coalition sticks to its promises of a minimum income for the poor, a flat tax rate of 15-20% and a pension reform, Italian treasury yields will keep rising and the budget simply will not add up. For now, investors remain cautious, as 10-year BTP-Bund spreads remains their highest in 5 years, at 3.53%. The situation is also pushing EUR/USD downward, heading toward 1.1250.
We assume the single currency is not immune to another shock. There is a high likelihood that the EU won’t implement sanctions short-term, as this would fuel anti-EU passions and add additional pressure on the single currency. However, the Italian government might back down on its full plan. The European Central Bank’s reaction is unclear, but supporting Italy would be counter to its monetary normalization path.
