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Smooth Sunday Summit?

23rd November 2018 Market Update

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🇬🇧 GBP – Sterling hit highs of 1.2920 yesterday following reports that the UK and the EU were seeking a free-trade area after Brexit, whilst also being determined to replace the Irish border backstop. In addition, the agreement indicated that there would be equivalence for UK banks in the EU, but negotiations are still being held up over the issues around Gibraltar and the fishing rights of different countries after the divorce deal. While Sterling has since fallen off from these higher levels, it remains steady as reports indicate that the two parties have pledged an ‘ambitious, broad, deep and flexible partnership.’ Previously, such a significant agreement would have caused GBP/USD to move into the 1.30’s; the reason we haven’t seen this is that of ongoing fears that any agreed deal will be voted down in parliament. Such a view was supported yesterday by former Brexit Minister Dominic Raab who claimed that the deal in its current form wouldn’t pass a parliamentary vote given the deep divisions between hard-line Eurosceptics and staunch pro-EU factions. As a result, the Pound is very volatile as it swings up and down on rumours and headlines.

🇪🇺 EUR – In a somewhat familiar story, data out this morning indicated a slowdown in economic growth across the Eurozone following weaker than expected PMI’s; these caused the Euro to fall nearly half a per cent. The likely cause for the weaker data is the ongoing US driven trade wars which will be a concern for the European Central Bank as they prepare to bring an end to their €2.6bn asset purchase programme in December. In addition, the German private sector grew by the smallest amount in nearly four years as goods production grew at a much slower pace. Given the importance of Germany to the Eurozone economy, Europe may struggle to grow without the support of its ‘locomotive.’ Indeed, today’s data comes after the minutes of the ECB’s latest meeting were released yesterday. These minutes indicated that in their eyes, Eurozone data was weaker than expected but largely in line with expansion and gradually rising inflationary pressures. The minutes also indicated that there was evidence of risks to growth tilting towards the downside; a view that has since been corroborated by the data.

🇺🇸 USD – Yesterday was a quiet day for the Dollar as families across the US and indeed the world celebrated Thanksgiving, meaning that US markets were closed. More generally, Dollar sceptics continue to point to fears around the pace of future interest rate increases by the US Federal Reserve as a key reason to short the Dollar. As such we have seen the greenback lose ground over the past two sessions as the US Dollar index drifts away from the 16-month highs we saw earlier this month. That being said, there remains a high conviction of a fourth 2018 rate hike on December 18th which should keep the Dollar well bed in the short term. Looking ahead, markets are trying to see how much more scope there is for further tightening, without causing a slowdown in a domestic economy which continues to perform well despite an increasing cost of borrowing.

 

Summary:
GBP: Negotiations in the Political Declaration around the future of EU-UK relations continue to go well; few issues remain but expectations are high for a smooth summit on Sunday;
EUR: Weaker than expected PMIs in Europe tell a tale of softening growth across the EU;
USD: US markets closed yesterday due to Thanksgiving, as views towards the dollar soften moving into 2019.

 

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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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