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Barnier boosts, DUP debilitates

11th October 2018 Market Update

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?? GBP – Last night Theresa May’s coalition partner, the DUP threatened to call the police on the Brexit party by warning that they would vote down the UK budget and May’s leadership in early November if their wishes weren’t respected on the Irish border issue. This is after Michel Barnier helped Sterling surge past $1.32 yesterday in a speech that indicated that the UK Brexit deal was 80-85% agreed despite the ongoing issues over Northern Ireland.

While that hurdle still needs to be overcome, Barnier’s reconciliatory tone six days ahead of a crucial EU summit bodes well for a solution to be made in time. In less good news, the government expects the City of London to lose 5,000 jobs because of Brexit according to an article in this morning’s City AM. This news, alongside the threats from the DUP – has helped temper some of the enthusiasm around Barnier’s comments. Looking forward, the market is looking towards speeches from BoE Governor Mark Carney and MPC member Gertjan Vlieghe for fresh impetus on Sterling.

?? USD – The Dollar was broadly weaker yesterday as a global sell-off in equities was caused by concerns over the impact of rising interest rates and the impending impact of the US’ trade war with China. As part of this, the US stock market had its largest decline in more than eight months while rising US Treasury yields encouraged investors to move away from riskier assets. Given that the outperformance of the stock market under his tenure was one of Donald’s most impressive achievements, he was quick to come out and claim that the ‘Fed has gone crazy’ in what I personally think is a classic case of pot-kettle-black. Up next for the Dollar is the all-important US CPI numbers out at 1.30pm GMT where expectations of a slight increase to 2.3% should help to justify the Fed’s hawkish stance in the face of Trump’s continued criticism.

?? EUR – The Euro weakness story appears to have the legs with the finish line well out-of-sight. The key issues appear to be the lack of growth in the Eurozone area and with interest rates at 0% – there is little room to manoeuvre were there to be a sustained recession in larger economies such as Italy. Furthermore, with the European Parliamentary election in May 2019, the Italian populist 5Stars Movement and right wing League have already made promises to cause problems for the European Union. Added to this are the issues with the German economy which are either underlying or being overlooked as this week saw German industrial output fall for the third time in as many months meaning the country has failed to sustain its strong start to the year. In addition, given that Germany is Europe’s largest economy (Italy = 4th), rumours suggesting the government will revise down its growth forecasts tomorrow – indicates that short term, there is also little respite for the single currency. As such GBP/EUR is currently at its highest level since June making it a potentially good time to buy.

 

Summary: 
GBP: Brexit news continues to dictate Sterling strength as the DUP’s threats to vote down any Brexit deal offset the constructive speech by EU chief negotiator Michel Barnier who claims 80-85% of withdrawal agreement in place;
USD: Dollar broadly weaker as part of equity sell-off ahead of important CPI data out later on today;
EUR: Euro weakness story looks likely to continue with both short-term and long-term risks aplenty.

 

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Ali Malik

Ali Malik

Ali is responsible for providing clients with relevant foreign exchange advice, daily reporting and pricing to ensure they are updatede of all market moves. His experience includes working for Goldman Sachs, UBS and Lloyds Development Capital.

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