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Deal, Delay or No Deal

23rd January 2019 Market Update

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🇬🇧 GBP – Cable continues to trade towards the upper end of its range for the past two months following news that the Labour Party now seems to be formally backing a delay to the Article 50 process. In addition, yesterday the Pound gained 0.5 per cent against the Dollar following data indicating that the UK labour market remained strong despite the perceived economic slowdown as part of which, average weekly earnings rose by 3.4 per cent on the year, making it the biggest rise since mid-2008. Away from the data, this morning Liam Fox, Britain’s Secretary of State for International Trade has been emphasising the negative impact of a ‘No Deal’ Brexit, which is a continuation of the government’s attempts to scare relevant parties into either agreeing on a deal or delaying the implementation of Article 50. As part of his concerns, Fox mentioned that following a ‘No Deal’, the lack of a transitionary period would mean that the UK would be without trade deals for a number of non-EU countries, which would take a great deal of time to negotiate; in the interim, UK businesses would suffer. In terms of data today, the UK calendar is empty meaning any moves in GBP/USD will be at the whim of political headlines.

🇺🇸 USD – The Dollar has continued to fight off rumours of its demise at the start of 2019, which was predicted to be the year we saw the greenback weaken as the impact of Donald Trump’s 2018 tax breaks begin to decrease and the Fed’s increasing interest rates cause the economy to slow. However, this has not been the case as a combination of strong US data alongside safe-have asset flows have meant that the Dollar has had a very steady start to the year. This is evidenced by the fact that this morning it has held near a three week high, a move which was helped by the Bank of Japan keeping their monetary policy unchanged overnight. In more good news for the Dollar, there appears to be some movement on the government shutdown as the Senate will vote tomorrow on a pair of bills; one, backed by Republicans would meet President Trump’s demands over the border with Mexico while the other would extend funding for closed agencies. In the other major issue surrounding the US which is perhaps keeping the Dollar in check, is the US-China trade talks. As part of this, the latest update this morning saw White House economic advisor Larry Kudlow deny reports that the US had cancelled their trade meetings with Chinese officials, which helped the Dollar recover some of the losses had made when the report first surfaced.

🇪🇺 EUR – EUR/USD appears to be stuck in a rut as investors await tomorrows ECB meeting. As a reminder, 2019 was hoped to be the year of the Euro, but instead, the single currency has declined against each one of its G10 peers as slowing Euro-area growth, slowing inflation and lingering political risks are keeping Euro bulls very much in check. As part of this, money market rates in the Eurozone continue to languish near their 2018 lows, which is not being helped by the expectation that the ECB is unlikely to do very much as part of Thursday’s meeting. Indeed, ECB President Mario Draghi is likely to follow the lead of Japan in keeping rates due in part to the slowing growth in the Eurozone. These were exacerbated yesterday after data indicated that the German assessment of the economy’s current condition was at a four-year low, despite a slight improvement in morale. On the plus side, the growing divergence between the US and European interest rates has meant that for corporate businesses, EUR/USD hedging costs are dropping.

 

Summary:
GBP: Sterling remains well bid following the increasing chances of either a softer Brexit, or no Brexit at all, as the government makes moves to stop a ‘No Deal’ outcome;
USD: Dollar remains well bid despite analysts predicting that 2019 would be the year we see it fall from its peak;
EUR: Same old story in the Eurozone area, as poor growth, slowing inflation and expectations of an increasingly dovish ECB keep EUR/USD stuck in a rut.

 

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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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