bank of england

Brexit defeat looms for the PM

6th December 2018 Market Update

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🇬🇧 GBP – As we near the end of the week, the large divisions in UK politics as well as the cloud of uncertainty around Brexit continues to weigh on the Pound. As part of this, it is hoped that Tuesday’s vote on Theresa May’s Brexit deal will help give some further clarity on the likely trajectory of the Pound in the short term. In line with this, according to a Reuters poll – Sterling will gain 3.5 per cent if the deal is agreed while a 2.5% fall is likely if the deal is rejected. This data comes amid speculation that Tuesday’s Commons vote could be delayed to avoid a defeat for the Prime Minister, which could well cause Sterling to fall off again. This is despite Theresa May stating this morning that she had not given up on winning the vote on her Brexit deal, despite large swathes of her own MPs and all opposition parties were against it. As this issue continues to plague the short term, longer term there remains some optimism within the market. This can be seen as part of the same Reuters poll in which almost 90 per cent of the economists asked, believed that the most likely outcome was that the two sides would agree on a free-trade deal. That being said, those taking the poll also had the view that Britain’s economy would expand a meagre 0.3-0.4% per quarter until mid-2020, well below the growth expected of its peers.

🇺🇸 USD – This morning has seen pressure on risky assets increase following the arrest and extradition of the CFO of the global Chinese phone company, Huawei – which is set to increase tensions between the US and China, only days after the short-term trade war truce was agreed. As a result, the Dollar has strengthened as the market reverts to its relative safety in light of the fall in the likelihood of a permanent trade truce. At the same time, the Dollar’s longer-term future is less positive according to (another) Reuters poll in which investors believe the Dollar will weaken in 2019 on increasing concerns around the pace of US economic growth. Linked to these fears, we have seen signals from the Fed over the past week that it may be nearing the end of its rate hiking cycle which in turn has caused a fall in US Treasury yields. Now whilst that may sound overly complicated, a fall in yields and a ‘flattening of the yield curve’ is simply seen as an indication of a slowing economy as fears of a potential recession down the road become more prevalent. As such, the Dollar is likely to remain under pressure until the Federal Reserve meeting on the 18th December where it is hoped interest rates will be increased. Before that though, today will see Jerome Powell give his testimony to Congress as the market looks for further clarity on the Fed’s stance on the economy.

🇪🇺 EUR – Without wanting to sound like a broken record – the Euro remains on the backfoot as a result of weak economic data as well as the political tensions that exist throughout the Eurozone. That being said, the EU cannot be blamed for doing nothing as yesterday they released a paper on plans to promote the international use of the Euro by using it for energy agreements and contracts with countries outside of the EU. To give this some context, at present – 36 per cent of the value of international transactions are conducting using the Euro, compared with the 40 per cent of transactions that use the Dollar. However, only 20 per cent of international foreign reserves are held by the Euro. It is the desire of the European Union that the Euro should reflect the political, economic, and financial weight of the Eurozone. Needless to say, if the EU are successful – we could yet see demand for the Euro increase, which in turn would help it strengthen after a relatively weak second half of 2018.

 

Summary:
GBP: Sterling remains on the backfoot as investors await Tuesday’s vote;
USD: Arrest and extradition of Chinese CFO adds to trade tensions between the US and China;
EUR: The EU seek to enhance the international use of the Euro.

 

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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 updated of all market moves. His experience includes working for Goldman Sachs, UBS and Lloyds Development Capital.

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