Global currency markets face a testing week ahead

​​​​​​Today's news headlines:

  • 'Stocks, yields rise after deal announced to end U.S. government shutdown.’ The temporary reopening of the US Federal Government is providing some support for financial markets, but the Dollar has been left on the back foot, at least for now. (Reuters)
  • 'The world economy faces some pivotal health checkups this week’. A series of key events and data releases are expected from right across the globe this week, including China-US trade talks, Eurozone growth data, and Brexit developments. Market volatility is to be expected as a result. (Bloomberg)
  • 'Get a grip on Brexit, businesses tell UK's quarrelling politicians’. Business leaders are becoming increasingly worried over the deadline which is now just two months away and are said to be praying for an extension to Article 50. (Reuters)

There are expectations for a potentially volatile week ahead in the currency market, with a raft of geopolitical and economic announcements being keenly awaited. Friday saw the news that the US government shutdown had been resolved, at least temporarily. While this was good for US equities, the fact that the deadlock could resume in a matter of weeks has done little to provide any support for the US Dollar. The safe-haven allure of the Greenback is once again seen as lacking, with other more attractive options such as the Swiss Franc and Japanese Yen winning out. However, as the week progresses, the uptake of the latest US government debt auction will be closely followed, as the country is having to ramp up its bond issuance in a bid to fund the widening deficit. On top of this, high-level officials from China and the US convene in an attempt to find a way to resolve the trade war. The Federal Open Market Committee (FOMC) will also give its first monetary policy statement of the year. In isolation, any of these events have the potential to provide meaningful direction for the Dollar.

There’s no let-up in the Brexit grandstanding by politicians ahead of tomorrow’s vote in parliament. Procedurally there’s the potential for events to unfold in a manner which could escalate political risk significantly, as one of the options up for debate would see Members of Parliament taking control of the political agenda from the government. As has been seen over the last week, the Pound has made notable gains off the back of hopes that a no-deal Brexit can be avoided. Although tomorrow’s political progress may add further weight to this idea, it could also push the country one step closer to a general election. The idea of a Jeremy Corbyn government could readily serve to limit further upside potential for the Pound.

Eurozone Gross Domestic Product (GDP) data for the final quarter of 2018 is also set for publication on Thursday. Following Friday’s disappointing German business confidence readings, expansion expectations are downbeat. Growth of just 0.2% is expected, and there’s mounting concern that if global trade tensions cannot be resolved, then a recession will be on the horizon for the trading bloc in the very near future. Whether the Pound can find any upside here remains to be seen. However, despite Brexit, the economies of the UK and the Eurozone will remain inextricably linked. It could prove to be an incredibly volatile week all round.

GBP/USD

The Pound pushed out to fresh three-month highs against the US Dollar on Friday evening, driven by uncertainty over what happens next in terms of the Federal Government’s temporary refinancing. With critical events on both sides of the Atlantic due this week, the pair could still see further significant moves in the near-term.

EUR/USD

Sharp gains were recorded by the Euro on Friday evening against the US Dollar, recovering more than the losses seen earlier in the week. However, the rally appears to be stalling early in the European session as the market awaits the next key economic releases.

GBP/EUR

Towards the end of last week, the Pound pushed out to 20-month highs against the Euro. This proved unsustainable through Friday’s session, although tomorrow’s events in the UK parliament could provide justification for further gains, even if just in the short-term.