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2nd January 2019 Market Update

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🇬🇧 GBP – Having spent the majority of 2018 on the backfoot, Sterling ended the year on a relative high surging above 1.28 on Monday briefly before settling back around the mid-1.27 mark. This is following a year in which GBP/USD fell by more than six per cent on the back of continued Brexit worries. For those of you who are getting bored of the B-word, unfortunately, it does appear to be going away any time soon. Linked to this – the latest comments come from Foreign Secretary Jeremy Hunt, who believes that Theresa May’s deal could get through Parliament if the EU were to confirm that any implementation of the Irish backstop would be temporary. In response, the EC’s chief negotiator Jean-Claude Juncker demanded the UK ‘get its act together’, as it is not up to the EU to resolve British problems. The problem is, despite Theresa May’s best attempts to get the required reassurances from the EU to help her win the required support – she continues to face an uphill struggle to get her vote to pass when it takes place on the third week of this month. In terms of the data – this morning saw an upbeat UK manufacturing PMI come in at 54.2 for December versus the 53.1 figure reported in November; but given all the Brexit noise, we saw a little move up in GBP/USD as a result.

🇺🇸 USD – Looking into 2019, the majority of analysts seem to agree that the Dollar will weaken as the effects of Donald Trump’s tax stimulus continue to wane, and the Federal Reserve looks to end its interest rate hiking cycle. As part of this, according to a Reuters poll – based on the average forecasts made, the Dollar will be down 5 percent by the end of 2019, while according to the CME – there currently stands an 80 percent chance that we will see no more rate hikes in 2019, versus a figure of 25 per cent only a month ago. Away from the Fed, the US-China trade dispute continues to rumble on and following Trumps ‘long and very good call’ with Chinese President Xi Jinping on Sunday, the ‘People’s Daily’, a Chinese state-owned newspaper cautioned that Beijing ‘has not given in… and will never give in’ when it comes to the core national interests; indicating that a resolution may still be a way off. Furthermore, another issue worth mentioning is the partial U.S. government shutdown which is now into its eleventh day, as reports emerged last night that Trump was willing to make a deal to end the shutdown. In terms of impact, the closure has impacted nine of the fifteen federal departments, a number of agencies and hundreds of thousands of workers. All of these issues and increased levels of uncertainty are keeping the Dollar on the backfoot as we begin the new year.

🇪🇺 EUR – In terms of the Euro, similar to Sterling – the second half of 2018 was very much one of weakness as it ended the year down 4.4 per cent against the Dollar, having started the year a little above the $1.20 handle. This was due to a number of problems and issues aside from Brexit, which include German political instability as a result of the waning influence of Angela Merkel’s CDU Party. In addition to that, the Italian Budget Crisis – whilst it is coming to an end, it is yet to be resolved, as the Yellow Vests continue to protest in France. All of these issues are increasing the level of uncertainty in the Eurozone areas and adding to its ongoing weakness. Furthermore, these issues have been occurring in an environment of slowing growth and inflation which both remain below the European Central Bank’s target. Looking ahead in 2019, we expect more of the same – with any moves up in EUR/USD likely to be driven by Dollar weakness as opposed to any Euro strength.

 

Summary:
GBP: Brexit continues to dictate the rates as we await our next headline; Upbeat PMI has little impact;
USD: Issues mounting for the Dollar as 2019 is forecast to be a much weaker year;
EUR: Eurozone continues to be blighted by political uncertainty and lack of economic growth.

 

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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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