8th February 2019 Market Update
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🇬🇧 GBP – Sterling has fallen back into the mid-1.2950 range following yesterday’s Bank of England press conference where interest rates were unanimously kept on hold, while Governor Mark Carney indicated that any future moves would be entirely Brexit dependent. As part of the release, the BoE said that 2019 was the year in which Britain was likely to experience its weakest economic growth in ten years blaming the mounting Brexit uncertainty and the global slowdown. Growth forecasts were slashed from 1.7 per cent to 1.2 per cent as the BoE expects just 0.2 per cent growth in both the first and second quarter of the year. This news, in turn, caused Sterling to fall by half a per cent before then recovering back to test the 1.30 level, which indicates the extent to which investors are more concerned about Brexit headlines, as opposed to the central bank’s economic outlook. Given that, the latest Brexit development is that Theresa May and EU leaders have agreed to continue negotiations following ‘robust but constructive talks,’ in a bid to break the Brexit deadlock. As part of this, she will travel to Dublin today to discuss the Irish backstop with counterpart Leo Varadkar as she seeks legally binding changes to the backstop, despite both the EU and the Irish PM repeatedly rejecting her attempts to make any changes to the current deal.
🇺🇸 USD – US-China trade tensions take the headlines this morning as President Trump indicated late last night that he was unlikely to meet President Xi Jinping before the end of the current trade truce, which is set to end on March 1st. As a result, the US dollar has remained well supported as investors are drawing out of riskier assets such as equities and instead choosing to hold their money in cash. Despite the panic, if we do not see a solution by the deadline, there still remains a chance of an extension which would avoid the imposition of tariffs on Chinese goods at the start of March. As a result of these safe-haven flows, the dollar is holding close to two-week highs against the euro this morning while the US Dollar Index approaches new highs for 2019. A lot of this is due in part to the weakness we are also seeing in the USD’s main currency partners as we are seeing a number of central banks put tightening plans on hold. This includes the Reserve Bank of Australia, the European Central Bank and the Bank of England, while the Reserve Bank of India unexpectedly cut rates on Thursday. In comparison, the US economy is looking relatively robust as policymakers seek to manage its overheating. As a reminder, 2019 was meant to be the year we saw the dollar peak, and yet the global weakness actually means it is currently the best of a bad bunch.
🇪🇺 EUR – As the author of the market report, I am struggling to think of new ways every day to describe the battering of the European economy, but yesterday was no exception. After the ongoing stream of poor data we have seen specifically within Germany, as well as the Eurozone as a whole, the European Commission came out with their growth forecasts for 2019. Unsurprisingly, all countries bar Greece saw their forecasts slashed. Of these, the Italian forecast stood out as it fell from 1.2 per cent to 0.2 per cent which could have ramifications for its budget going forward. This was not helped by this morning’s Industrial output data coming in well below expectations. As a result, following a terrible week of data and economic releases, the single currency is in line for its biggest weekly loss in four months, as it appears the economic slowdown in Europe is spreading. Interestingly, all of this combined has cause Philip Wee, a currency strategist at DBS Bank to forecast that the euro will depreciate below $1.10 this year as a result of Europe’s weaker growth and poor inflation outlook, compared to the relative strength of the US.
GBP: The Bank of England slashes growth expectations for the UK, whilst indicating that interest rate moves in 2019 will be Brexit dependent;
USD: President Trump indicates that he is unlikely to meet President Xi before the end of trade truce, causing increased US dollar safe-haven flows;
EUR: Euro in line for worst weekly losses in four months due to ongoing stream of poor data, including the European Commission’s slashing of growth forecasts across the Eurozone area.
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