Plan B Brexit?

22nd January 2019 Market Update

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?? GBP - Whilst the market didn’t hold much hope for Plan B Brexit, what was presented to the Commons yesterday was, by and large, the same deal that was rejected by 230 votes last week. As a result, the odds of success for the ‘updated’ Plan A remain very low but despite this, Sterling has managed to hold onto its gains from last week. This is because, on a probability-weighted basis, the alternatives that are now presenting themselves are largely Sterling positive. Firstly, the chances of a second referendum have increased, especially after Jeremy Corbyn chose to not rule out another people’s vote in a speech yesterday. In addition, talks are emerging of a vastly different plan to the one on the table which would include a customs union. While there remain positive and negatives to all available options, the majority guarantee an extension to Article 50 and perhaps a better deal overall for the UK. That being said, with each passing day – the option of a ‘No Deal’ Brexit remains a factor in clouding the optimism of bullish Sterling investors. Indeed, it appears this concern is also prevalent in the Commons as this morning The Times reported that up to 40 members of the UK government would resign if Conservative MPs are banned from voting for a plan to stop a ‘No Deal’ Brexit.

?? USD - Indicators from this morning’s Asian markets which have opened lower overnight show signs that the positive sentiment towards the US-China trade talks subsiding. In addition, the IMF cut its 2019 and 2020 global growth forecasts to 3.5 per cent and 3.6 per cent respectively, due to a larger than anticipated slowdown in China and in the Eurozone. As a reminder, yesterday saw China’s economic growth levels fall to a 28 year low, while the Eurozone has been struggling with low levels of growth and inflation since mid-2018. These issues of slowing global growth, alongside ongoing trade issues between two of the world’s largest economies, are making for a less conducive environment for investing and as a result, we have seen the Dollar strengthen to three-week highs on safe-haven flows. At the same time, these slowing levels of growth are causing a more cautious approach by the Fed as part of their plans to control inflation and the US economy in 2019. Data-wise, the ongoing government shutdown means that we will have to wait until Thursday’s Jobless Claims and PMI numbers for anything significant for the Dollar.

?? EUR - As has recently been the case with the Euro, investors are looking for an uptick in the data, but unfortunately this morning’s German ZEW is expected to show a modest decline in line with the overall issues within the German economy. This data is the only significant indicator we have until tomorrow’s preliminary consumer confidence numbers and Thursday’s PMI’s ahead of the headline event this week – the ECB Meeting where it is expected that interest rates will be kept on hold. Interestingly this morning, European Economic and Financial Affairs Commissioner Pierre Moscovici declined to comment on the lower economic growth forecast issued by the IMF overnight, in anticipation of the European Commission’s own forecasts for all countries within the EU next month. All of these factors combined mean that EUR/USD will remain on the soft side, meaning the GBP/EUR rate holds more upside than down amidst the volatility we are seeing with Brexit.

 

Summary:
GBP: Government’s Plan B unlikely to break deadlock in the Commons as alternative options are discussed;
USD: Dollar benefitting from safe-haven flows overnight following IMF cut in growth forecasts and softening optimism towards US-China trade talks;
EUR: Data expected to be softer ahead of dovish ECB Meeting on Thursday, which all points towards a softer Euro.

 

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