From Belfast to Brussels

7th February 2019 Market Update

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🇬🇧 GBP – Sterling slipped to fresh two-week lows against the dollar this morning ahead of the Bank of England’s MPC meeting to announce its interest rate plans. As part of this, they are expected to leave policy unchanged as they seek to maintain a steady approach to tightening. Alongside this, we expect Mark Carney to strike a note of caution around Brexit and the possible dangers of a hard exit. This is following a slew of weak data out of the UK this week which is indicative of the decline in domestic demand, despite the strong evidence for solid wage growth. As a result, the BoE is unlikely to act with some analysts expecting that we could yet see the 15 basis point move that is currently priced in unravel if we see further Brexit delays. Linked to that, Prime Minister Theresa May will go to Brussels today in an attempt to secure some EU concessions, of which her chances remain very slim. This is after some fiery rhetoric from Donald Tusk yesterday who claimed that ‘there was a special place in hell’ for those who pushed for the UK’s exit from the EU, and yet had no idea of how this should be carried out. On the other hand, some believe this to be an open invite from the European Council President to propose something new on the backstop issue that would satisfy all parties.

🇺🇸 USD – The dollar is performing well across the board this morning following last night’s speech by Federal Chair Jerome Powell who gave a short, but positive assessment of the economy at a time when the majority of the world’s central banks are looking to take a tightening pause. Linked to this, Treasury Secretary Steven Mnuchin yesterday claimed that the US economy continues to ‘perform extremely well’ amidst signs of a ‘slowdown in Europe and other parts of the world.’ As part of this interview, Mnuchin also indicated that there was still a lot of work required on the trade dispute between US and China, as he is due to travel to Beijing next week for the third round of talks as the March 1st deadline steadily approaches. Finally, the other big risk factor for the dollar is on the domestic front where there continues to be little progress between Congress and the White House on reaching a deal to keep the government open. Data-wise, today is fairly light and so we expect any dollar moves to be made off the back of political headlines and rhetoric.

🇪🇺 EUR – When it rains, it pours as far as the German economy is concerned as today we saw German industrial production fell by 0.4 per cent versus an expectation for a 0.7 per cent increase, which could yet see EUR/USD fall to new lows for the month. As a reminder, the single currency has been resilient against the dollar, helped by a dovish Fed in the past week, but this may not continue as investors are now forecasting that the ECB will keep monetary policy on hold in 2019 due to the weaker than expected growth and low inflation within the Eurozone. With regards to this, today will see the European Commission released its economic growth forecasts for which it is hard to see much optimism; in fact, expectations are for a slash in the growth outlook for all countries including Italy which has recently fallen into a technical recession. If we do see a sharp fall in the forecasted growth rates for Europe’s largest economies, there is every chance that we could see EUR/USD fall towards the $1.13 level, having previously been as high as $1.15 on January 31st.

 

Summary:
GBP: All eyes on the BoE with expectations that interest rates will be kept on hold; May travels from Belfast to Brussels on Brexit;
USD: Dollar performing well due to a strong economy, despite a lack of progress in negotiations, both internationally and domestically;
EUR: German industrial production falls ahead of the release of the European Commission’s updated growth forecasts.

 

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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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