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Brexit vote promises volatility

9th January 2019 Market Update

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🇬🇧 GBP – Yesterday, GBP/USD was 0.5 per cent lower after the government confirmed that the vote on Prime Minister Theresa May’s Brexit deal would take place on January 15th. This was mostly due to the fact that any deal is unlikely to get through Parliament due to a lack of support. This was further evidenced last night as the government suffered a defeat in their attempts to pass an amendment which would have given them greater ability to make tax changes in the event of a no-deal Brexit. As part of this, 20 Conservatives rebelled against the government, which was the first reverse for the government on such legislation since 1978 serving as a good indicator of the lack of support May currently holds. Looking ahead today, Parliament is set to resume their debate on Brexit, and more specifically the terms of the UK’s withdrawal, with any headlines coming out of it likely to increase volatility. Meanwhile, Mark Carney is set to speak as part of an online Bank of England Q&A session, where he expected to remain dovish given the ongoing Brexit stalemate.

🇺🇸 USD – News that the US-China trade talks have been extended for the third day have helped to breed a certain amount of optimism in global markets as we continue to see an increase in risk-on investing. This has been fuelled by news that negotiators had made progress on issues such as the purchase of U.S. goods and services as President Trump took time out of his schedule to tweet that “Talks with China are going very well!” As far as the president is concerned, he remains eager to strike a deal in an effort to help Wall Street recoup some of the steep losses suffered in recent months. In addition, he is also intent on extending the government shutdown as he appears unwilling to back down on his attempts to secure funding for a border ‘barrier’ with Mexico. This is because, according to him – 90% of heroin sold in the US came through Mexico, as he also cited cases of American citizens “savagely murdered in cold blood” by undocumented immigrants as part of a speech last night. In terms of impact on rates, the shutdown isn’t having a huge impact on sentiment just yet, but it does have the potential to do so if it drags on. With regards to this, we expect Friday to be a significant marker as it will be the first day that government employees will fail to receive their paycheques as part of the shutdown.

🇪🇺 EUR – EUR/USD was down 0.3 per cent yesterday following a continuation of the poor data that has been synonymous with the Eurozone of late. However, whilst any familiarity with the situation in Europe has the danger of breeding some contempt, yesterday’s data was more significant for the following reasons. Firstly, the country that has been most commonly known as the ‘engine of growth’ for Europe saw industrial production fell 1.9 per cent MoM in November – the sharpest drop since 2015, while the October drop was revised downwards to -0.8 per cent (prev. -0.5%). As a result, German industrial production is now down 4.7 per cent for the year. Secondly, this morning’s trade data provided little respite as German exports for November dropped 0.4 per cent MoM, from 0.7 per cent in October while imports also dropped 1.6 per cent MoM. As if that was not enough; yesterday the Economic sentiment indicator for Europe as a whole fell to its lowest level since January 2017 after a 12-month streak of falling sentiment, making it the bloc’s worst run since the global financial crisis. All of this soggy data only helps to reduce the likelihood of a rate hike in 2019, which also serves to limit the upside for the Euro moving forward.

 

Summary:
GBP: GBP/USD down as Brexit vote looms; Parliament to continue debate on Brexit divorce bill today – volatility expected;
USD: News of an extension to US-China trade talks helps to fuel ‘risk-on’ sentiment in the US;
EUR: Eurozone data continues to bottom out, as fears of a potential recession for the German growth engine increase.

 

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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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