Trade progress at G20 bolsters demand for risk; Dollar retreats

Today's news headlines:

  • ‘Brexit: Gove warns of referendum if MPs don't back PM's deal’. Support for current compromise is waning, which Michael Gove believes could result in a second EU referendum. (BBC News)
  • ‘Federal Reserve prepares to give investors murkier view on policy’. Fed on the cusp of providing less guidance over future rates given tepid inflation and rising risks. (Financial Times)
  • ‘U.S., China reach a truce on trade’. Temporary suspension of further tariffs announced as the two sides prep for more negotiations. (The Wall Street Journal)

It was a busy weekend in geopolitical circles; fresh questions were asked over the validity of the UK Prime Minister’s approach towards Brexit, there were heightened levels of public disorder in Paris, but it was arguably developments in Argentina that stole the show. The G20 convened for the annual world leaders’ summit, and while US-China trade relations were expected to be a side-show, developments in the situation ultimately stole the spotlight. A lot of work still lies ahead, but Washington has agreed to suspend further tariff increases for 90 days, while Beijing has committed to a series of purchases from the US. This is positive not just for China, but also for emerging markets as a whole, and the Dollar index has now reversed most of the gains seen going into the weekend break as appetite for risk creeps higher.

It seems inevitable that Sterling will be in for a turbulent few days, with the Brexit debates due to start on Tuesday. However, the government’s Attorney General will deliver a statement later today on the legal advice received over the Irish border backstop component of Brexit. There’s concern that this component of the deal would leave the UK tied to the EU in perpetuity, many politicians are demanding sight of the full advice, but the government maintains this is confidential. This may look like a string of technicalities, but it has the potential to bring the Brexit process crashing down, with the accompanying uncertainty likely to weigh further on the Pound.

The UK November Manufacturing Purchasing Managers’ Index (PMI) is set to be published at 9.30am GMT and is expected to show some expansion. While politics will continue to dominate the agenda for Sterling in the short term, failure to deliver the forecast growth here will doubtless be seen as negative for the Pound. Demand amongst consumers for credit is waning, and the Bank of England (BoE) is wary about stubbing out what economic expansion there is. A lacklustre PMI print would do little to bolster hopes of a UK interest rate hike any time soon. 

The Federal Reserve continues to reiterate that it is close to breaking with the policy of one rate hike every quarter, but broadly speaking the economic data still doesn’t appear to be supporting a more dovish approach. ISM Manufacturing and Employment data for November, plus Construction Spending for October are amongst today’s highlights; failure to see any deceleration will have the potential to see overnight losses on the Dollar being reversed. While the Fed needs to remain two steps ahead when it comes to managing inflation, if the underlying economy remains strong then breaking from the hawkish policy stance will be challenging.

GBP/USD

The risk-on mindset in the wake of the G20 meeting has driven the Pound around half a cent higher against the dollar. However, enthusiasm for further gains is likely to be limited given the overhang of Brexit and the heightened political risk faced by the UK.

EUR/USD

Again, the Euro has rallied against the Dollar in recent hours although the pair still remains below last week’s highs. Political and economic uncertainty in the Eurozone has the potential to reign in upside potential here.

GBP/EUR

Some marked volatility was seen overnight, and although this was reversed, downside pressures are being maintained on the Pound. The real risk of political upheaval as the Brexit saga continues is likely to limit enthusiasm for buying the Pound, at least until there’s a little more clarity over the state of the UK government.