EU rebuffs Johnson’s demand to remove NI ‘backstop’

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21 August 2019


Sterling rallied by around three-quarters of a percent against the US dollar yesterday afternoon on what proved to be short-lived optimism regarding the possibility of a solution to the Brexit saga.

rime Minister Boris Johnson wrote a letter to the European Union earlier this week, noting his desire to see the so-called Northern Irish ‘backstop’ removed from the current withdrawal agreement. Comments from German Chancellor Angela Merkel gave investors hope on Tuesday after she said that the EU would think of practical solutions to break the NI impasse.

This optimism was, however, seemingly misplaced. It is worth stressing that Merkel herself again ruled out the possibility of a renegotiation to the existing withdrawal agreement. The European Union itself also later rebuffed his demands, with European Commission President Tusk stating that Johnson had not provided any alternative solutions.

Investors appear to remain cautiously optimistic, at best, that some sort of agreement can be reached. The pound gave up some of yesterday’s gains this morning, although still remains supported above the 1.21 mark against the dollar. How long this remains the case is likely to depend on how Boris Johnson’s discussions go with EU leaders later this week.

Dollar retraces gains ahead of Jackson Hole conference

Expectations for a dovish tone of communications from FOMC chair Jerome Powell at this week’s central bank conference in Jackson Hole caused the dollar to edge off its strongest position in three weeks on Tuesday.
Members from some of the world’s major central banks will gather in Wyoming on Thursday and Friday, with almost all attention firmly on Powell’s remarks. Following its first rate cut in over a decade in July, the Fed is heavily expected to lower rates again at its next meeting in September. Powell is highly likely to pave the way for the aforementioned cut this week, with the key to the currency markets instead his comments regarding the pace and timing of additional rate cuts beyond September.

In the lead up to the Jackson Hole meet, investors will have this evening’s Federal Reserve minutes from its July meeting to digest. In the three weeks since the meeting, global risks have escalated, namely the threat of higher tariffs on China from President Trump, the Hong Kong protests and Brexit. With that being the case, investors may choose to overlook tonight’s minutes, given its dated nature. That being said, it will still be worth seeing whether the minutes allude to how many policymakers are growing increasingly concerned about the emergence of external downside risks and whether they see extra stimulus as warranted.