Brexit in focus as key vote just hours away

Today's news headlines:

  • 'Safe-haven Yen up versus Dollar after China slowdown sparks risk-off’. Investors may be looking for safety, but with growing concerns over the outlook for the US economy, the Dollar is losing its allure. (Reuters)
  • ‘EU attempts to give Brexit reassurances ahead of a crunch vote’. Letters from Brussels and speculation that pro-Brexit MPs may support Theresa May’s deal proved sufficient to lift the Pound briefly to a two-month high. (CNBC)
  • ‘Pound creeps higher in Asia ahead of Brexit vote’. The Prime Minister’s warning that rejecting the deal which will be tabled tonight could lead to no Brexit at all served to bolster Sterling. (Financial Times)
  • ‘ECB faces now-or-never dilemma for 2019 rate hike, Lampe says’. A German bank has noted that with the economic outlook set to worsen in 2020, time is against the European Central Bank (ECB) to start tightening monetary policy and a rate hike is needed before the end of the year. (Bloomberg)

China’s economic slowdown and the US government shut down may be ongoing, but it appears that without much doubt, today will be dominated by the pivotal vote over Brexit, which will be held in parliament at some point after 7pm GMT. This remains a hugely complex situation which won’t yield a simple binary outcome, but recent gains for the Pound suggest that the risk of the UK crashing out of the European Union without any deal whatsoever has been significantly diminished. Further movement for Sterling is to be expected in the hours leading up to the vote, while the market’s interpretation of the outcome has the potential to inject some significant volatility for the currency later this evening too. Today still won’t mark the end of the saga, but the outcome will at least have the potential to provide some clarity over where Sterling goes next.

The Chinese economic slowdown continues to raise questions over the near-term outlook for global trade. On Tuesday, central bank officials in Beijing stressed that monetary policy would be kept flexible, while it was also stated that taxes would be slashed in a bid to bolster the finances of small enterprises as the country looks to navigate its worst economic storm since the Global Financial Crisis a decade ago. Markets have reacted by seeking out safe-havens, although it has been the Japanese Yen which appears to be a more notable beneficiary on this occasion. With a considered policy outlook having already been tabled for the year by the Bank of Japan (BoJ) and the ongoing uncertainty that is surrounding the US political scene, the Dollar has evidently lost some of its allure for those seeking to avoid risk. However, this does suggest that once the US government shutdown is resolved, the Dollar may be at risk of an exaggerated move higher.

Demands are building, at least in Germany, for the European Central Bank (ECB) to make a move on interest rates. Consensus estimates now see the first hike being pushed from the third to the fourth quarter of the year, but a majority of German companies want to see rates rise and economists are backing the idea, too. The challenge is that if rates remain at ultra-low levels, there’s no scope for cuts to stimulate the economy when the need arrives, instead forcing more creative stimulus policies to be deployed. However, with the Eurozone once again showing diverging rates of growth, any uplift in borrowing costs could prove damaging for some. Yesterday’s Industrial Production data showed a sharp drop, and there’s little reason to believe this is a temporary blip. Germany and Italy are likely to be in technical recession—denoted by two consecutive quarters of negative growth—by March.

GBP/USD

The Pound traded up to levels not seen since mid-November against the US Dollar during yesterday’s session as hopes of avoiding a no-deal Brexit continued to build. The Greenback’s lack of safe-haven allure is also weighing here.

EUR/USD

The Euro is trading broadly flat against the US Dollar with both currencies facing meaningful headwinds right now. Eurozone Gross Domestic Product (GDP) data for 2018 could deliver some fresh direction for EUR/USD when released later this morning.

GBP/EUR

Again, the Pound is finding support over the Euro ahead of tonight’s Brexit vote. Recent gains have been far less dramatic than those seen ahead of the weekend break, but any reassurance that the worst-case scenario of ‘no deal’ can be avoided as the UK looks to break away from the European Union, has the potential to provide further cheer in the short-term.