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Back to the Brexit Drawing Board

4th February 2019 Market Update

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🇬🇧 GBP – Unfortunately for our readers, for whom the Brexit saga has now likely reached a saturation point – today will see PM Theresa May stay in Downing Street as she prepares a new deal to present to Brussels later on this week. However, given the EU’s refusal to negotiate on the current deal, we expect a response of continued intransigence, meaning that the 14th February is the next key date for Parliament to potentially prevent a damaging hard Brexit. Meanwhile, away from Downing Street, MP’s are set to discuss backstop ‘alternatives’ as Brexit Secretary Stephen Barclay begins three days of discussions with MP’s and government officials around the ‘Malthouse Compromise’ as part of his ‘Alternative Arrangements’ working group. Away from Brexit – interestingly, Friday saw the UK data have its day as the UK’s manufacturing PMI fell to 52.8 points, which was well below expectations, causing Sterling to fall off in the aftermath. Looking ahead at this week, today will see the release of UK Construction PMI, which is expected to show very moderate growth while Thursday will also see the Bank of England meet, with expectations that interest rates will be kept on hold. This is due mostly in part by the blinding effects of Brexit as whilst the economy is doing well, with low unemployment and rising real wages, the ongoing uncertainty means the BoE are unable to raise rates with any confidence.

🇺🇸 USD – Despite having a relatively subdued week last week as a result of the Federal Reserve’s dovish release on Thursday, the Dollar had a very strong day on Friday as a result of US Jobs data which included strong job growth which in turn is helping to push up wages and support the view that the US economy remains in good health. Furthermore, with the government shutdown now temporarily over, we expect a backlog of delayed US data over the next couple of weeks, including GDP, Retail Sales as well as trade and durable goods orders which will provide a better idea of the economy. Looking ahead this week, as markets continue to digest the Fed’s interest rate pause as well as the strong US labour market – the other focus will be trade data in light of the ongoing US-China trade talks. As a reminder, last week saw the conclusion of intense talks in Washington as we now await the announcement of direct negotiations between President Trump and President XI. But first, the beloved President is set to give his State of the Union address tomorrow, which could move the Dollar if he offers any further tax cuts or infrastructure spending, or indeed any indication that he was willing to avoid another government shutdown.

🇪🇺 EUR – Based on the FX options markets, EUR/USD appears to be rangebound as its implied volatility for the year has fallen below 7 per cent, which is exceptionally low for the Euro. This is following a very data heavy week last week during which the releases came out largely weaker than expected. In terms of the economies in focus, this week will see a conclusion to the H218 data out of Germany after what has been a very disappointing second half of the year for its economy with any significant rebound remaining unlikely. In addition, this morning we await the Italian inflation data which has the power to weaken the Euro as the impact of its recession is measured. Looking ahead this week we are also set for European PPI’s today as well as Services PMIs for Europe, while tomorrow will see the release of Retail Sales for Europe in an otherwise quiet week for the Eurozone. On the political side, the upcoming EU parliamentary elections in May should start to garner interest, as investors remain concerned about the potential advance of populists views amongst its members. Another potential issue on the horizon for the Euro includes negative developments between Europe and the US over US auto tariffs which could see it soften further.

 

Summary:
GBP: Theresa May goes back to the drawing board, while her Brexit Secretary Stephen Barclay assembles the ‘Alternative Arrangements’ working group;
USD: US Jobs data helps to support the Dollar after a week in which the Federal Reserve indicates a reduced need for rate hikes going forward;
EUR: Germany and Italian economies in focus this week ahead of data releases today and tomorrow.

 

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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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