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Brexit: No end in sight

19th October 2018 Market Update

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?? GBP – Sterling lost strength yesterday following the conclusion of the EU summit as it hit new weekly lows against its main currency partners. The primary cause for this was the news, or lack thereof in terms of solutions to ongoing Brexit negotiations as both parties seemed to agree on the possibility of a required extension to the transition period, as Jean Claude Juncker said that ‘extending the transition period will probably happen’. In response, this morning many newspapers are reporting of a ‘backlash’ of sorts within May’s own cabinet as Scottish Secretary David Mundell supposedly openly condemned the move while Tory backbench MP Jacob Rees-Mogg viewed it as ‘a rather poor attempt at kicking the can down the road.’ Despite this, given that markets were well informed that there would be no significant deal as a result of yesterday’s summit – the move down for Sterling was not as pronounced as it could have been. Looking ahead today, we see a very data-light day with any big moves for Sterling likely to be Brexit-led.

?? EUR – As expected, the EU have responded to the draft Italian Budget asking for an explanation in a letter to Giovanni Tria, the Italian Finance Minister. As part of the letter, the EU Commission deemed the budget constituted ‘an obvious significant deviation’ from EU rules with planned government spending being too high, meaning Italy’s structural deficit was likely to rise, instead of fall; the EU response is the first step of what has the potential to become a full-blown standoff between Rome and Brussels. Saying that, the Commission were keen to express their desire to seek a constructive dialogue with Italy to reach a final assessment, giving a deadline of until midday on October 22nd for them to respond. Away from the ongoing Italy-saga, Mario Draghi yesterday told EU leaders that the Eurozone economic outlook remained positive as part of a speech in Brussels, but this small boost was not enough to offset the larger move down for the Euro.

?? USD – Yesterday the Dollar was well supported by the words of Federal Reserve Governor Randal Quarles who, like the majority of his other Federal Reserve colleagues voiced optimism about the US economy’s ability to grow faster without overheating. In the immediate aftermath, we saw the Dollar make a strong move upwards. Interestingly, his words also came amid a sharp decline in US stocks which further supported the positive Dollar move as investors moved out of equities, instead deciding to seek safe harbour assets. In addition – in more good news for the greenback, US jobless claims hit a 45 year low as companies appeared to shake off any significant trade war worries; including the increasing tensions between the US and Saudi Arabia over the apparent death of Saudi journalist Jamal Khashoggi, as well as the ongoing back and forth between the US and China over trade tariffs.

 

Summary: 
GBP: Sterling continues to face Brexit challenges due to lack of progress in negotiations and subsequent political backlash at home;
EUR: EU Commission responds to Draft Italy Budget describing it as ‘an obvious significant deviation’ from EU rules;
USD: Dollar continues to be will bid as the good news and positive sentiment keeps on coming.

 

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Darren Kilner

Darren Kilner

Darren is Head of Dealing at FairFX. Darren lives and breaths FX, his Mastermind topics are G8 currencies and economic forecasts.

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