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Market’s in ‘Wait and See’ Mode

18th December 2018 Market Update

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🇬🇧 GBP – The next big date for your Brexit diary is the week commencing January 14th, as yesterday Theresa May announced that the vote on her Brexit deal would be delayed until the new year. As a result, Sterling remained very rangebound yesterday as it appears investors were looking to take a ‘wait and see’ approach. Aside from the obvious inconvenience of the delay, the vote is scheduled to take place only seven days before the January 21st deadline which has been imposed by the EU Withdrawal Act, which requires May to provide an update to negotiators on the status of any deal. As such, we remain stuck in limbo as the Brexit story looks to have stalled over the Christmas period which will likely give rise to a fall in volatility and a steadier, albeit weaker Sterling. In terms of its direction – there appears to be some disagreement with some analysts arguing that the market was currently pricing out the likelihood of a ‘No Deal Brexit’ whilst ABN Amro believe that investors were under-pricing the higher chance of a more positive scenario. Whatever side of the fence you sit, the main victim in all of this is the UK economy. This is supported by the British Chamber of Commerce who have released data indicating that a mixture of Sterling uncertainty alongside a contraction of economic growth to its lowest level since 2009, is set to severely harm the UK economy. As part of this, business investment is set to contract by 0.6 per cent in 2018, before growing by 0.1 per cent in 2019.

🇺🇸 USD – The Dollar continues to tread water this morning, with a slight leaning towards the downside ahead of this week’s Federal Reserve Meeting amid ongoing concerns for global growth and fears of a government shutdown. As part of tomorrow’s meeting, the Fed is widely expected to implement a ‘Dovish hike’ and the Dollar’s fortunes are very much at the whim of the news and forward guidance that we receive as a result. At present, data out of the US is strong enough to warrant a hike but an increase in interest rates could be accompanied by a cautious tone around the US economy; this is despite a very hawkish Fed formerly indicating that we could see as many as three rate rises in 2019. This change in approach is largely due to the belief that higher US borrowing costs will hurt US growth and ultimately force the Fed’s hand. On the other hand, there is also a slim chance Jerome Powell could come out tomorrow and indicate that there was still scope for the three rate rises, as previously promised, which would help the Dollar strengthen significantly. No prizes for guessing which approach Donald Trump would rather see as last night he tweeted that it was ‘incredible’ to even consider tightening given the global economic and political uncertainties.

🇪🇺 EUR – The Euro was up slightly this morning as it looked to recover the losses it experienced yesterday on the back of weak Eurozone data. Indeed, the single currency is currently being supported by the likelihood that we may see a Budget agreement between the EC and Italy before we see any further progress on Brexit, which could yet help GBP/EUR move lower. In terms of progress, we have our fingers crossed that the saga is drawing to a close as Italy appear willing to settle on an agreed deficit around 2.04 per cent. In response, Italy’s bond market bounced yesterday as borrowing costs fell to their lowest levels in 2 months. Whilst this is some rare good news for the Italian economy, there remain many other factors behind its steady economic decline which need to be resolved. This includes continued uncertainty around the budget as well as falling global demand for Italian manufacturing services. Away from Italy, there are also budgetary issues bubbling in France as, according to German Economic Minister Peter Altmaier – France has very little “room to manoeuvre” on their current 2019 deficit of 3.4%, which is ironic as Italy are being penalised over a significantly smaller ratio.

 

Summary:
GBP: Theresa May has set a date in the New Year for the next Parliamentary vote on Brexit; Sterling remains rangebound as a result;
USD: Dollar investors hold their breath ahead of tomorrow’s Federal Reserve meeting; Dollar slightly weaker;
EUR: Progress in Italian budgetary negotiations currently being undermined by simmering issues around France’s 2019 budget.

 

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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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