Currencies consolidate ahead of busy week

28th January 2019 Market Update

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🇬🇧 GBP – GBP/USD rose more than 2.2 per cent to hit an eleven-week high last week, as it broke through the key $1.30 resistance level caused by a more optimistic tone around Brexit and Theresa May’s ‘Plan B’. To summarise some of the key reasons for the move up; firstly European Commissioner for Economic Affairs Pierre Mocovici said on Wednesday that the EU would support a second Brexit referendum in the UK while Michel Barnier said that the EU was ready to negotiate should the UK be willing to compromise on their red lines. Following that, the Northern Ireland’s DUP have privately agreed to support Theresa May’s ‘Plan B’ which is set to be voted on tomorrow. In addition, according to the data, the UK labour market remained resilient with unemployment dropping to a four-decade low of 4 per cent while regular pay in the UK increases above expectations by 3.4 per cent in the three months to November. Looking ahead, the most significant event of the week is scheduled for tomorrow as the Commons will vote on a number of Brexit deal amendments proposed by MP’s, as well as Theresa May’s Brexit ‘Plan B’, which as mentioned – could well be voted in with the support of the DUP. If so, expect Sterling to rally higher again with the potential to break through the latest resistance level around $1.32. Until the vote, it appears traders are consolidating their positions, while a speech from Mark Carney due at 2.30pm today will be closely watched for near term trading impetus.

🇺🇸 USD – The big news out of the US this weekend was surrounding the Federal Government, which will now reopen for 3 weeks as negotiations continue over how to fund the US’ border wall with Mexico. The reopening followed President Donald Trump backing down after a monthlong standoff during which he failed to force Democrats to fund his long-promised wall with Mexico. In other big news for the Dollar, this week will see the latest Federal Reserve Meeting in which the Fed is widely expected to keep interest rates on hold; this is due in part to the limited data flow as a result of the government shutdown but also the growing concerns around global growth. As a result, financial markets are looking at pricing in the risk of a rate cut, more than an increase, but the strength of the US labour market makes this more unlikely. Meanwhile, the ongoing trade negotiations between the US and China will be in focus as Chinese officials will arrive in the US on Wednesday to try and resolve the long-running trade war between the two economic powerhouses. Any significant progress could well boost the case for a rate hike in June, while this Friday will also see the release of the US labour market report which is expected to be strong.

🇪🇺 EUR – EUR/USD is consolidating around the $1.14 mark this morning as it struggles to add to Friday’s gains for the single currency. In terms of the week ahead, it is an important one for the Eurozone as we await large swathes of data including European Consumer Confidence, Retail Sales, CPI’s and PMI’s . With regards to these, up until now, the Q4 numbers for the economies in the European Union have been especially poor and this week’s data will likely confirm that, as we are also set to receive the first GDP estimates for Q418. In addition, inflation is also a key figure out this week; as a reminder, it has been on the downtrend and away from the ECB’s target due in part to the ongoing fall in oil prices. This is of course after Friday’s dismal survey results from the German research institute which has export expectations slumping, only a week after the Business Confidence index in Germany fell to its lowest level in two and a half years. All of this we hope will be addressed today in a speech by Mario Draghi at 2pm today in an otherwise quiet day for the Euro.

 

Summary:
GBP: GBP/USD consolidates gains after hitting 11-week high last week, and ahead of key Brexit vote tomorrow.
USD: Trump backs down on border wall, allowing the government to reopen;
EUR: Data heavy week in the Eurozone has the potential to confirm the economic slump.

 

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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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