White smoke rose from Brussels and Monday yesterday as Boris Johnson and Michel Barnier announced that a deal for an orderly withdrawal from the EU had been reached, sending sterling on yet another wild rally to fresh highs. Sterling pared back some of the gains however as it quickly became clear the details of the deal required significant further concessions from the DUP, Johnson’s unionist allies from Northern Ireland. The agreement relies on complicated customs arrangements that keep Northern Ireland in the UK Customs Union – but subject to EU market rules and checks on goods trade with mainland Britain. The mechanism that gives Northern Ireland the opportunity to consent to remaining in the arrangements after 4 years also fell short of the DUP’s initial red lines, as it required only a simple majority in Stormont to continue the arrangements. The DUP, unsurprisingly, quickly said that they would not be supporting the proposal in Parliament. Johnson still faces daunting parliamentary arithmetic on Saturday when the deal is voted on in the Commons, but received a boost from a surprising place in the afternoon, when Jean-Claude Juncker spoke against a further extension in Brexit. Juncker does not have the authority to decide if an extension is granted, which will be done by EU states – but his intervention will help Boris argue that his deal is the only alternative to no deal. Yesterday’s data also included Retail Sales, which changed 0.0% in September after contracting 0.3% in August. Politics will continue to determine sterling’s fate, as markets attempt to judge what chances of success Boris’s deal has in the House of Commons tomorrow. Today is the second day of the EU summit, and the attitudes of EU leaders to an extension of the Brexit deadline will also be a key factor for the pound.


The euro also surged as news of a Brexit deal was announced yesterday, and managed to hold on to the majority of its gains versus the US dollar while trading broadly flat against the pound. News flow aside from Brexit was thin in Europe, as EU leaders headed to Brussels for a summit. New tariffs on EU goods from the US are due to take effect today, totally $7.5 billion of trade including cheese, wine, and whisky, in relation to the TWO state aid case regarding airbus. The EU has threatened retaliation, raising the spectre of a new front in Trump’s trade war hitting the already fragile EU economy. This morning’s sole data of note will be the Eurozone’s Current Account, at 09:00 BST, and the EU Summit will continue today.


The dollar found itself under pressure yesterday, as the sterling and euro rallies triggered by Brexit news seemed to affect other currencies, including the loonie. The US data calendar was busy yesterday, with the Philly Fed Manufacturing Index falling to a reading of 5.6, consistent with the generally negative tone of US manufacturing survey data. Unemployment Claims remained low at 214,00, and Building Permits fell by less than expected, to 1.39 million in September, although Housing Starts registered a sharp fall in the same month. September’s Industrial Output figures were dismal, and showed a contraction of 0.4%, the sixth negative reading in the nine months of this year, although industrial action may have contributed to September’s decline. New York Fed President John Williams made some surprisingly hawkish comments, saying that the risks that led the Fed to cut rates recently do not mandate further easing and that policy should be made “meeting by meeting”. Fixed income markets overwhelmingly expect further rate cuts from the Fed in the near future. There will be some more Fedspeak this afternoon, with Esther George of the Kansas Fed speaking at 15:00, followed by Richard Clarida at 16:30.


Good manufacturing sales, a positive estimate of jobs growth, and favourable USMCA headlines combined with a slightly soft tone in the US dollar to send the loonie soaring yesterday. The Canadian Dollar reached its strongest point against its US equivalent since September. Manufacturing Sales rose a solid 0.8% in August, erasing the two previous months of declines. US House Speaker Nancy Pelosi said of USMCA “I can honestly say that I think every day we’re becoming closer,”, while Mexican President Andrés Manuel López Obrador sent a letter pledging to fully implement the labour market reforms required by the agreement. The Bank of Canada’s Tim Lane will speak today at 22:30 BST.


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