Brexit Backstep

12th November 2018 Market Update

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?? GBP -  Following a positive week last week, Sterling has seen a large drop off this morning as Theresa May was forced to abandon plans for an emergency cabinet meeting to approve a Brexit deal over the weekend, following fresh opposition both at home and abroad. At home, Mrs May is facing the threat of further resignations from several pro-EU ministers after Jo Johnson, the former transport minister, walked out on Friday. In addition, May is under pressure from Eurosceptics such as Andrea Leadsom, the Commons leader, who warned on Sunday that parliament would reject any attempt to give the EU a say over when the UK can leave any temporary customs union. On the European side of the negotiation table, the EU is pushing Britain to accept stringent environmental targets as well as oversight by the European Court of Justice on the Irish backstop plan. As a result, it is looking increasingly unlikely that a special EU summit to sign off any deal will be held in November, as had been hoped. This has also meant increasing fears around the likelihood of a ‘No Deal’ Brexit for which there are currently rumours that the UK military has been contacted about their possible deployment if required. With all of this Brexit noise, the UK economy is actually performing reasonably well and this week, expectations are high for UK wages, inflation and retail sales all to come out on the strong side.

?? USD - The Dollar rose towards a 16 month high against the Euro this morning as the US Federal Reserve reaffirmed its tight monetary policy going forward, citing a strong economy as the main factor. This is following last week’s mid-term results which have done little to dent US growth optimism with the now Democrat-majority House even discussing the possibility of new infrastructure projects which should help the Dollar story into 2019. In addition, today is Veteran’s Day in the US – and as such US markets are closed; often this allows for a greater level of volatility meaning that otherwise unachievable rates become possible, for which Limit Orders are the best way to take advantage. As evidence of this – we have seen EUR/USD drop below the 1.13 level for the first time since June 2017. Looking ahead this week, market expectations are for inflation to remain at 2.2% YoY while Retail Sales are expected to remain strong. As well as that, we will also hear from a number of Federal Reserve speakers, including Federal Reserve Chair - Jerome Powell.

?? EUR - For the Euro, the story remains challenged as we await the second reading of Eurozone Q3 GDP, which previously disappointed at 0.2% QoQ. We are also awaiting the first reading for German growth, which some expect to contract after a positive start to the year in which a strong German economy was helping to fuel a Euro resurgence. In addition, tomorrow will likely provide the latest chapters in the Italian budgetary story, as the Italians have been sent back to the drawing board by the European Commission; as of yet they are showing no signs of any willingness to budge with tomorrow’s deadline likely to bring a continuation of the back and forth between both parties.

 

Summary:
GBP: Brexit plans thrown into turmoil over the weekend as May is forced to cancel Brexit Cabinet meetings following fresh opposition at home and abroad;
USD: The Dollar heads into this week on a high as the Fed promises more interest rate hikes;
EUR: Big week ahead this week as we await the Italian response on their rejected budget, while data on Germany is expected to indicate a QoQ decline in growth.

 

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