19th December 2018 Market Update
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🇬🇧 GBP – As the clock ticks down towards March 29th, today leaves the Prime Minister and her government only 100 days to negotiate a deal out of the European Union. The alternative would be to leave without a divorce deal, which all economists agree would be very detrimental to both the UK economy and its various businesses. As it stands, there appear to be three main options; to agree a last minute deal, leaving without a deal, or calling the whole thing off altogether, with the approval of the British people. While it would be a fool’s errand to attempt to put any sort of likelihood on each of these outcomes, a ‘No Deal’ is now looking more and more possible and is this outcome that is certain to be the most damaging, and least desirable. This is supported by Governor Mark Carney who likened it to the 1970’s oil shock, which I hope will resonate with some of our older readers. Such a prospect is also made worse by the fact that while certain companies have established preliminary contingency plans, hundreds of thousands of firms are yet to start planning. In terms of the Pound, as mentioned yesterday – it remains very rangebound as it struggles to find any reason for a sustained move higher. An example of this is this morning’s CPI which came out in line with expectations, leaving the GBP/USD largely static; any moves up or down will likely be led by news coming out of the Fed later on today.
🇺🇸 USD – As far as currency markets are concerned, the big market mover today will be coming out of the US as investors await the Federal Reserve’s interest rate decision. In anticipation, the Dollar has softened this morning, despite the majority of the market (currently 69% according to CME) being of the belief that interest rates will see a 25 bps increase. This is because having previously been very hawkish towards the US economy, the Fed is widely tipped to express caution about future monetary tightening as a result of slowing global growth. In other news, President Donald Trump has backed down on threats to shut down the US government after Democrats refused to grant him the necessary $5bn to build his wall on the US border with Mexico. Being honest, when we first heard about the idea we believed it to be some sort of joke, but as the months have passed – the wall has become a distinct reality. Unfortunately for Donald, keeping the lights on in the number of Federal agencies is a little more pressing as several would shut down if both parties fail to reach a last minute agreement on funding. Recent history tells us this will not be the case but any failure to do so will see the Dollar continue its recent trend downwards.
🇪🇺 EUR – As part of the Dollar weakness story we have seen over the past three days, the Euro hit one-week highs this morning as the single currency has enjoyed a rare uptick. As part of this, the Euro was also supported by rumours out yesterday that Italy had received verbal assurances from the EU who have supposedly accepted their proposed 2019 budget deficit of 2.04 per cent. This news, if true, would bring an end to months of negotiations between the two sides, which had served to enhance uncertainty and further weaken the single currency. Up next, we await a speech from Italian Prime Minister Conte today, which should help to either support or deny the rumours. Any indication of a confirmed agreement should help support the Euro which has struggled in an environment of slow growth and reduced business confidence throughout 2018. The concerns are, that this will continue through to 2019 as evidenced by this morning’s German Ifo reading which indicated that sentiment amongst German exporters has significantly weakened as Export Expectations for manufacturing fell from 12.2 balance points to 8.7 between November and December as it appears German firms are also beset by fears of a hard Brexit.
GBP: As each day passes, the likelihood of a No Deal Brexit increases as businesses ramp up their contingency plans.
USD: A big day for the Dollar as the Fed is set to announce both their interest rate decision and the likely path of rates in 2019.
EUR: Rumours circulate of an agreement between Europe and Italy over contentious Budget as German data continues to disappoint.
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