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The (relative) Calm before the Storm

11th January 2019 Market Update

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🇬🇧 GBP – Sterling continues to be under pressure following the latest reports that Theresa May is openly discussing a Brexit ‘Plan B’ as it appears she may have given up on attempts to try and get her current deal to pass a vote in Parliament on Tuesday. As a result, the GBP/USD rate fell by 0.2 per cent yesterday, due in part to the Dollar’s mild recovery after a tough couple of days. In fact, yesterday was a relatively quiet day for Sterling ahead of what promises to be a very volatile week as a failure by May to get her Brexit deal approved could well see Britain’s exit from the EU descend into chaos. With only 77 days left until March 29th, there appear to be growing fears amongst Brexiteers that the UK may yet stay in the European Union. This includes leading Brexit donors such as billionaire Peter Hargreaves and hedge fund manager Crispin Odey who said this morning that Britain will not leave the EU. Interestingly, this aligns with the threats made Foreign Minister Jeremy Hunt who, presumably as a last gasp attempt to convince MPs to get on side, emphasised the risk that pro-Brexit lawmakers were taking by rejecting May’s deal, which could lead to a ‘Brexit paralysis’ after which ‘who knows what might happen.’

🇺🇸 USD – Yesterday, the Dollar made a recovery following more speeches from Federal Reserve members who emphasised the US Central Bank’s ability to be patient and flexible on monetary policy has given the stable nature of inflation (for which we will receive up to date numbers later on today). These comments were also echoed by Fed Vice Chair Richard Clarida who also struck a dovish tone and as result markets are now pricing in no additional rate hikes in 2019. The question now appears to be whether or not any rate cuts are expected as to whether we will see any considerable Dollar weakness going forward. Separately, the Dollar is also being affected by increasing optimism for a trade deal between the US and China, as yesterday, US Treasury Secretary Steven Mnuchin indicated that Chinese VP Liu He will ‘most likely’ visit Washington later in January for trade talks. That being said, President Trump has had to pull out of his upcoming trip to Davos to focus on coming up with a resolution to the government shutdown, which is now into its record-equalling 21st day. We feel that today may really bring things to a head as it will be the first payday that 800,000 US government employees will not be paid. Bearing in mind these are families with rent, bills and outgoings to meet, the ongoing shutdown is likely to hit hard, which in turn will impact US economy as a whole.

🇪🇺 EUR – EUR/USD fell 0.2 per cent in yesterday’s session having previously hit 3-month highs as lower European share prices, and regional posturing ahead of the European Parliamentary elections in May caused the Euro to soften. In addition, yesterday saw French industrial production decline by 1.3 per cent and manufacturing production also decrease by 1.4 per cent, while goods production decreased by 2.2% in November. As a result, ECB member Francois Villeroy de Galhau yesterday claimed that the central bank should keep its options open and wait until the spring before tweaking policy. This is after minutes were released from the ECB’s December meeting which showed that their general assessment of the economy was still moderately positive as it attributed the weakening of the economy in H218 to one-off factors and a loss of momentum. Looking ahead, the next ECB meeting is scheduled for two weeks from now where all eyes will be on how the latest set of disappointing data across the Eurozone, and in France and Germany, in particular, will impact the ECB’s assessment.

 

Summary:
GBP: Sterling under pressure as rates remain relatively steady ahead of Tuesday’s Brexit vote;
USD: Dollar stages a soft recovery following speeches from Fed members Powell and Clarida;
EUR: French data continues to defy the optimistic views of the ECB, whilst also keeping the Euro soft.

 

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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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