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Europe prepares for Article 50

A rebound in oil prices along with a bumper US consumer confidence number helped consolidate yesterday's rebound in stock markets, as they moved further away from the lows of this week.

The acceleration in US consumer confidence in March, to its highest level since December 2000, helped investors put to one side earlier concerns about the impact of the failure of the Trump administration’s healthcare plan.

It also helped US markets break their recent losing streak as the Dow closed higher, breaking an eight-day losing streak, while also pulling the US dollar higher as treasury yields edged back up again. The greenback was also helped by comments from Fed vice chair Stanley Fischer, that two additional rate rises this year was “about right”.

Yesterday's rebound was a welcome respite for US markets as investors appear to give the US administration the benefit of the doubt after the healthcare debacle, after pledges to concentrate on implementing tax reform.

The strong finish for US markets looks set to translate into a positive European open this morning with all eyes on the timing of today's confirmation by the UK that Article 50 will be triggered, setting in motion the start of the process leading to the UK’s exit from the EU, and marking the end of the phony war that has existed since the historic June Brexit vote.

The historic moment is expected to take place just as Theresa May winds up her weekly sparring session with Labour leader Jeremy Corbyn at prime minister's questions, with the British ambassador likely to deliver it in person to EU president Donald Tusk in Brussels.

Some have compared today’s events to a massive step into the unknown for the UK, which comes across as somewhat melodramatic, and the sort of nonsense we heard in the lead up to last year’s referendum. Are these people seriously suggesting that we ignore the result of a democratic vote as if politics in this country isn’t in a bad enough position already?

Today is also an opportunity to start the process on a new relationship with the EU, a relationship which pays more attention to what people want and not what politicians think they want.

The tone and contents of today’s letter are likely to be key and while the EU position has tended to dwell on the exit bill of about £50bn, and what happens to EU expats, this is somewhat of a red herring. The UK has already insisted that it wants to settle the issue of the rights of both EU and UK nationals quickly, while the sum of around £50bn equates to about five years of UK contributions.

Given that the exit process is likely to take two years minimum, and the UK pays £10bn annually, that’s £20bn straightaway. That leaves the sum of £30bn up for negotiation, before the EU has to agree on another budget before 2020, and in the greater scheme of things that’s likely to be small change.  

Mrs May has already indicated her position with respect to the single market and customs union given that the UK wants to control its borders and won’t sign up to free movement of people.

As such the letter is likely to set out the positions outlined in her Lancaster House speech in January, where she spoke of her desire to retain strong and cordial relations with the EU, while setting out a new relationship. The EU leader’s reaction to that speech was fairly calm and measured and a similar response is likely to come in the coming days.

In the short term nothing much is likely to change, particularly at a politically sensitive time for Europe with French and German election campaigns already well under way, which means any market reaction is likely to be fairly muted. 

Today marks a turning of the page and a new chapter on the UK’s relationship with the European Union. No one knows what lies ahead over the next two years, and there will be many twists and turns along the way, but one thing is certain: a deal is in the best interests of both sides,

Hopefully the EU will have learned some lessons from the shabby way they treated the concerns of Theresa May’s predecessor David Cameron over a year ago, by realising that the current status quo in Europe is unsustainable and that both sides adopt sensible and pragmatic positions in the coming weeks and months. History is likely to be unforgiving if they don’t.

EUR/USD – the failure to break through the 200 day MA has prompted a bearish daily reversal, which suggests that we could see a move back towards 1.0760 initially and even a move down towards the 1.0680 area. Above 1.0900 targets the 1.1000 area. 

GBP/USD – the failure to consolidate above the 1.2600 area has prompted a sharp selloff and bearish reversal, suggesting further declines towards the 1.2380 area initially. A break of 1.2380 could see a return to the 1.2200 area.

EUR/GBP – the move above 0.8670 has the potential to target a move towards the 0.8730 level. While this holds the recent range looks set to continue with support at the 0.8620 area. Above 0.8730 we could head back towards the highs at the 0.8800 area. 

USD/JPY – the failure to push below 110.00 has prompted a rebound and could well see a move back towards the 111.60 area initially. The US dollar needs to get back above the 111.60 area to stabilise and head back towards 112.50, or risk a move towards 108.50.

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