21st January 2019 Market Update
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🇬🇧 GBP – GBP/USD fell as much as 0.2 per cent overnight following reports that Theresa May was willing to give up on cross-party Brexit talks. This is following last week’s move up to $1.3001 on Thursday which was caused by investors taking comfort in the possibility for collaboration between the government and the opposition in Brexit negotiations. Unfortunately, with the UK government apparently very reluctant to water down it existing red lines, negotiations appear to have been unsuccessful. Despite this, Sterling has managed to hold on to half of its gains from last week as the application to extend Article 50 becomes increasingly likely. Linked to this, over the weekend – diplomats have indicated the European Union governments are disagreeing on how long the UK should delay Brexit by, with some pushing for an extension of as much as a year. Such a delay would help businesses plan a little better for the impact of Brexit, but given that we remain unclear on what any deal would look like – the continued uncertainty will only serve to damage the UK economic growth going forward. In terms of next steps, we await the latest details of a ‘Plan B’ from Theresa May later on today where she is expected to set out plans to axe the Irish backstop from her deal with the EU as it appears the PM’s focus has turned towards winning over the DUP and rebels in her own party as opposed to those dissenters in the Labour Party.
🇺🇸 USD – Today, US markets are closed as a result of Martin Luther King Day so we could see some added volatility as a result of the reduced liquidity in the US Dollar. This year’s day of remembrance comes amidst a record long US government shutdown which has now entered its fifth week, as part of which 800,000 workers are failing to receive their pay cheques. In terms of the economic impact the shutdown of a number of US Departments has meant, amongst other things, delays in new business permits, in the processing of federal loans as well as visa applications; all of which has the potential to stifle business activity and weaken economic growth. In addition to this, US market data is now sparse which means analysts are finding it increasingly difficult to gauge the performance of the US economy, while it is also increasing the likelihood of a pause in the Fed’s rate hiking plans. The other big ongoing issue for the US impacting financial markets is the US-China trade frictions which President Trump has described as ‘going very well’, which we imagine is little comfort for senior officials in China who have seen their economic growth fall to 6.6 per cent for 2018, which is the lowest level for 28 years.
🇪🇺 EUR – EUR/USD has remained trapped within a tight range as we look ahead to Thursday’s ECB meeting where it is expected that the ECB and Mario Draghi will further acknowledge that the downside risks to Eurozone growth have increased. As such, we are unlikely to see any change in interest rates as a result of the meeting as the economy continues to struggle. Also on Thursday, we will receive further insight into the Eurozone sentiment for January as the release of PMI’s will indicate whether orders continue to weaken as per previous readings, which if true – would fuel worries about a prolonged slowdown in growth. Draghi and co. have previously indicated that it remains too early to sound the alarm bells and avoiding any huge accident in financial markets or the economy, the ECB is expected to sit on their hands until the ECB’s June meeting. However, this is unlikely to stop analysts from seeking a change in tone over the forward guidance released as part of the meeting.
GBP: Cable trading slightly softer this morning as cross-party Brexit talks stall;
USD: MLK Holiday in the US will mean reduced liquidity and increased volatility for the Dollar;
EUR: Looking ahead this week we have the ECB meeting and Eurozone PMIs which will provide a useful gauge on Europe’s economy.
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