Brexit back in the spotlight

Today's news headlines:

  • ‘Trump’s shutdown surrender adds pressure to secure China trade win’. US Treasury Secretary Steven Mnuchin has stated that pre-talks are productive, although there’s still a series of significant issues to be tackled. (New York Times)
  • ‘Theresa May splits Tories over anti-backstop Brexit deal’. Ahead of tonight’s crucial next vote, Jacob Rees Mogg has said that he won’t back an amendment to replace the current backstop with an alternative, but other MPs appear more positive. If this amendment is selected for a vote, the result is likely to be close run. (The Guardian)
  • ‘ECB's Draghi warns that uncertainty is weighing on sentiment’. The European Central Bank Chief added to last week’s note of caution over the economy and has suggested that the next move may be to start delivering stimulus measures once again. (Reuters)

The UK’s increasingly painful split from the European Union will be high on the agenda once again today. Politicians in London are set to debate a series of amendments to the Brexit bill, with voting scheduled to begin after 7pm GMT tonight. Still, the challenge here is that it’s down to the Speaker of the House to select which of the 14 proposed amendments, ranging from blocking a no-deal outcome to making significant amendments to the bill, will be tabled. What the market will be watching for is a shift towards consensus, after the comprehensive defeat faced by the government earlier in the month. The Pound has been supported of late by the idea a no-deal Brexit can be avoided. Any suggestion following tonight’s voting that such an outcome may be moving back onto the table could stand to weigh on Sterling once again.

Talks aimed at breaking through the trade deadlock between the US and China are set to resume tomorrow. With the US Federal Government shutdown resolved at least for now, some progress here would be appreciated by the broader market, although the longer-term outlook could prove to be Dollar negative regardless. Anything that frees up global trade has the ability to fuel demand for risk, in turn seeing cash being reallocated into emerging market currencies. Conversely, failure to find a resolution could reduce global demand for US government debt, again taking a toll on the Greenback. There was evidently no sign of this yesterday after bond auctions saw healthy demand for the latest round of treasuries being offered, but the DXY Dollar index continues to wallow around two-week lows.

The European Central Bank (ECB) appears to be on the cusp of reigniting stimulus measures after comments from Mario Draghi yesterday cast an even more pessimistic view of the economic outlook. This is a marked reversal from the upbeat sentiment seen even as late as the end of last year, where the expectation was that the ECB would be in a position to start normalising monetary policy as soon as late summer. Any suggestion that cheaper borrowing will now follow has the potential to weigh on the outlook of the common currency, which has already been knocked by fears of stalling economic growth. Thursday’s Gross Domestic Product (GDP) growth data may reinforce this and could point towards recession.

GBP/USD

The Pound has weakened a little over the last 24 hours against the US Dollar, although the pair is waiting for meaningful direction. This is likely to be seen in tonight’s parliamentary vote with any further suggestions that a no-deal Brexit can be avoided having the potential to bolster support for Sterling.

EUR/USD

Again, the Euro is little changed against the US Dollar. With significant economic and geopolitical announcements due as the week unfolds, there seems to be little demand to try and second-guess the fundamentals.

GBP/EUR

The Pound is holding relatively steady against the Euro. There may be a little downside pressure being seen, although this needs to be taken in the context of the 5% gains accrued over the last two weeks. Tonight’s parliamentary vote will likely be pivotal in terms of where the currency pair goes next.