The FOMC Minutes, Brexit, And ECB Cancel Each Other Out

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The week ahead: Trade talks, FOMC minutes and Brexit in focus

18 February @ 14:40

By Lukman Otunuga, Research Analyst

It has been a relatively quiet start to another busy trading week, with stocks in Asia concluding higher and European shares remaining steady amid gradual improved optimism over potential progress in US-China trade negotiations. Although Wall Street is closed today due to Washington’s birthday, global stock markets will be hoping for more inspiration to push higher after President Trump tweeted that US-China talks have been “very productive”.

I do think that while reports of China and the US achieving a consensus in principle on major topics is a welcome development for financial markets, it remains too early for any celebrations. The clock is ticking fast on the end of the 90-day truce set late last year, and it remains wishful thinking to carry optimism that there will be a major breakthrough with a trade deal. The more likely scenario at this point is that both sides could agree to another extension on the previous truce, or that there is an extension to the March deadline for new China tariffs. A market-friendly outcome to these long-standing tensions is still very much needed to boost appetite for riskier assets.

Across the Atlantic, all eyes will be on the FOMC minutes mid-week that should offer further insight into how ‘patient’ and ‘flexible’ the Fed is on future rate hikes. If the minutes signal that US interest rates will be not increased at all in 2020, the Dollar is at risk of being dethroned as the king of the currency markets. The impact of last week’s disappointing retail sales report continues to be reflected in the Greenback’s bearish price action today, with the Dollar Index trading marginally below 96.70 as of writing. We see the Dollar weakness becoming a major theme in the near term, as political risk in the United States, disappointing domestic data and speculation of a pause in US monetary tightening decrease the Dollar’s competitive advantage against its major peers.

Investors should fasten their seat belts and prepare for a rocky ride on the British Pound, as Theresa May heads back to Brussels this week for more Brexit talks. With the European Union repeatedly stating that the Withdrawal Agreement is not open for renegotiations, May risks flying back home empty-handed. It is interesting how the Pound offered a muted reaction today despite several Labour MP’s resigning over the Brexit drama. Traders are becoming increasingly unconcerned with the endless political drama in the Commons, with some complacency over Brexit possibly seeping in. The Pound seems to be supported by expectations over the government extending Article 50 in an effort to prevent a no-deal Brexit.

Looking at the technical picture, the GBPUSD is pushing higher on the daily charts with prices finding comfort above the 1.2900 level. A solid daily close above this point should provide bulls with enough fuel to journey towards 1.3000.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

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U.K. to Hold Election in December, Opening New Phase in Brexit Odyssey

The vote throws back to the British people the bedeviling issue of how, or even if, their country should leave the European Union.

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LONDON — Prime Minister Boris Johnson of Britain, in the boldest gamble of his high-wire political career, won backing on Tuesday to hold a general election on Dec. 12, throwing back to the British people the bedeviling issue of how, or even if, their country should leave the European Union.

The 438-20 vote in Parliament, which came after the opposition Labour Party dropped its resistance, provided the starting gun for one of the most momentous and unpredictable campaigns in post-World War II Britain, a six-week race that could forever alter Britain’s relationship to Europe and its place in the world.

Much will hinge on the sentiments of a fickle British public that is not just divided into warring camps but exhausted with the whole shambolic process and hoping for something, anything, finally to be decided — as long as it is not for the other side.

The motion to hold the election must still go to the House of Lords, where it could conceivably be held up, but that was unlikely.

For Mr. Johnson, a flamboyant populist who took office in July and has presided over a period of unrelenting political upheaval but little tangible progress, the election is a bet that he and his Conservative Party can win a parliamentary majority by selling to the public a Brexit plan that Parliament has held up.

But it comes with extraordinary risks, not least that Britain could end up in the same political cul-de-sac it is in today, with no party winning a clear majority and with Parliament still hopelessly divided about the way forward, more than three years after Britons voted to leave the European Union.

It is also plausible that the divided opposition camp could put aside its differences and ride a wave of public disgust with the Conservative government’s failures to an upset victory that puts the Labour leader, Jeremy Corbyn, in the prime minister’s office and leads to a softening or outright reversal of Brexit.

“The gulf between left and right is so deep, and the outcome is so uncertain,” said Anand Menon, a professor of politics at Kings College London. “It is a uniquely volatile moment in our electoral history.”

Still, after weeks of paralysis, capped by another day of byzantine maneuvering in Parliament over the date of the vote, the prospect of going to the polls provided a rare moment of clarity. As Mr. Menon put it, “You can say many things about this election, but you can’t say it is not an election about big things.”

Facing a British public that is fed up with Brexit and campaigning in the early twilight of the days before Christmas, Mr. Johnson and his opponents will seek to frame the election around competing visions of Britain’s future: Mr. Johnson’s, based on a swift exit from the European Union; and the Labour Party’s, based on holding a second referendum on whether to leave at all.

History warns, however, that other issues could intrude, from crime or the stability of Britain’s National Health Service to an external shock, like a terrorist attack, or a peripheral issue that assumes symbolic importance.

Mr. Johnson’s predecessor, Theresa May, called a snap election in 2020, confident that she could expand her majority and strengthen her hand in negotiating a Brexit deal.

Instead, Mrs. May wound up with a shrunken majority after running a desultory campaign during which she was tarred for advocating a harsh new policy on care for the elderly that critics branded a “dementia tax.”

With two smaller parties, the Liberal Democrats and the hard-line Brexit Party, also contesting for votes, the choice of the next government could turn on a tiny number of Parliamentary seats. Far from securing a healthy majority, the next prime minister may have to govern with a minority, as Mr. Johnson has.

Britain last held a cold-weather election in February 1974, when an embattled Conservative prime minister, Edward Heath, went to the voters during a time of economic upheaval and labor unrest with a stark manifesto, “Who governs Britain?”

The result was a hung Parliament, and Heath had to give way to a Labour government.

What Mr. Johnson has going for him, many analysts agree, is a substantial lead over the Labour Party in the polls — more than 10 percentage points in some — and a clear message: he will take Britain out of the European Union.

“It’s great fodder for an election,” said Mujtaba Rahman, an expert on Brexit at the Eurasia Group, a political risk consultancy. “He can run a very compelling centrist campaign, albeit with a hard Brexit program.”

With his shambling charm and studiously unkempt style, Mr. Johnson is a singular presence on the campaign trail — a politician whose celebrity has put him on a first-name basis with virtually the entire country.

“Boris is one of the very few people in British politics who can enter an ordinary shopping center on a dull Wednesday afternoon and utterly transform the atmosphere,” said Andrew Gimson, who wrote a biography of Mr. Johnson. “People just want to have selfies taken with him.”

Mr. Johnson, 55, has not lost an election since 1997, when he stood for Parliament in Wales and was trounced by the Labour candidate. He was first elected to Parliament in 2001, in a safe Conservative district, and won two terms as mayor of London, where his antics — like getting stuck on a zip line during the Olympic Games, waving two Union Jacks — earned him further notice.

The flip side of Mr. Johnson’s devil-may-care manner, Mr. Gimson said, is that “he is tasteless and excessive and goes too far.” Those less flattering traits have been on display during the frequently toxic debate over Brexit in the House of Commons since Mr. Johnson took office.

He came under fierce criticism for dismissing threats of violence made against members of Parliament as “humbug.” And he was condemned, including by his own sister, Rachel, for saying that Britain should get Brexit done in the memory of Jo Cox, a member of Parliament who was ardently pro-European and was killed a week before the 2020 referendum by a right-wing assassin.

Mr. Johnson’s bare-knuckle tactics have dented his happy warrior image. Last summer he was booed during a visit to Scotland, which wants to stay in the European Union, and where he could face the first genuinely hostile crowds of his career during this campaign. He will have to go back to Scotland to try to hold on to Tory seats that are severely endangered by his Brexit policy.

The Conservative Party will try to make gains among Labour seats in northern England and the Midlands, where people voted in favor of Brexit. But it will have to defend seats in the south, where people voted to stay, from the Liberal Democrats, whose platform is to revoke Brexit altogether.

“Johnson is gambling that he can make up for the liberal votes he loses in cities and among ‘remain’ voters by attracting Labour voters in rural areas and the hinterlands,” Mr. Menon said. “If the Tories become the party of people in the hinterlands, that would be a huge change in British politics.”

Dominic Grieve, a longtime Tory who broke with Mr. Johnson over his Brexit strategy and was purged from the party, said the Conservatives had “hemorrhaged support from Middle England.” Some voters, he said, would be turned off by Mr. Johnson, whom he called a “populist demagogue who is unable to tell the truth.”

Mr. Johnson also has to worry about his right flank, where the Brexit Party could siphon off critical Conservative votes. He supplied that party’s leader, Nigel Farage, with a damaging talking point when he broke his vow to withdraw Britain from the European Union by Oct. 31, with or without a deal.

For the Labour Party, which anguished for days over whether to back an election, the risks are equally high. The party is deeply divided over Brexit, with some of its members ardent proponents of leaving while others are equally passionate about staying.

Mr. Corbyn himself seemed ready, saying on Tuesday that he would campaign all across Britain, including in Mr. Johnson’s home constituency in suburban London. He proved to be a surprisingly effective campaigner against Mrs. May in 2020, but he remains an unpopular figure nationally. Some members of Labour’s rank-and-file worry that an election is a prescription for defeat.

“There’s not really an appetite for an election on the Labour benches,” said David Lammy, a lawmaker from London, at a briefing sponsored by the Foreign Press Association. He predicted it would be “one of the nastiest, most brutal elections of our lifetimes,” and that no party would emerge with a clear majority. “We’re going to end up in the same fix we’re now in,” he said.

Mr. Johnson has viewed an election as the path out of the Brexit quagmire almost from the moment he became prime minister. He called for a vote four times, taunting Mr. Corbyn as a “chlorinated chicken” for resisting (Mr. Corbyn has warned that in the post-Brexit trade deal with the United States, Britons could be forced to buy chemically treated poultry from American exporters).

For all the risks of going to the voters, some analysts said, Mr. Johnson risked more by sitting on his hands. Lawmakers could tie up his Brexit deal with Brussels with amendments and block any other legislation. Commentators have already taken to saying he runs a “zombie government.”

“Admiral Nelson said the boldest measures are the safest,” said Mr. Gimson, referring to the 18th-century naval hero who vanquished Napoleon in the Battle of Trafalgar. “Boris also thinks the boldest measures are the safest.”

Stephen Castle and Megan Specia contributed reporting.

Brexit: What happens now?

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The UK left the EU on 31 January 2020 and has now entered an 11-month transition period.

During this period the UK effectively remains in the EU’s customs union and single market and continues to obey EU rules.

However, it is no longer part of the political institutions. So, for example, there are no longer any British MEPs in the European Parliament.

Future trade deal

The first priority will be to negotiate a trade deal with the EU. The UK wants as much access as possible for its goods and services to the EU.

But the government has made clear that the UK must leave the customs union and single market and end the overall jurisdiction of the European Court of Justice.

Time is short. The EU could take weeks to agree a formal negotiating mandate – all the remaining 27 member states and the European Parliament have to be in agreement. That means formal talks might only begin in March.

The government has ruled out any form of extension to the transition period.

If no trade deal has been agreed and ratified by the end of the year, then the UK faces the prospect of tariffs on exports to the EU.

The prime minister has argued that as the UK is completely aligned to EU rules, the negotiation should be straightforward. But critics have pointed out that the UK wishes to have the freedom to diverge from EU rules so it can do deals with other countries – and that will make negotiations more difficult.

It’s not just a trade deal that needs to be sorted out. The UK must agree how it is going to co-operate with the EU on security and law enforcement. The UK is set to leave the European Arrest Warrant scheme and will have to agree a replacement. It must also agree deals in a number of other areas where co-operation is needed.

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