Limited economic data makes for quiet start to the week beyond Brexit

Today's news headlines:

  • 'Dollar firm near two-week high, risk appetite unfazed by weak China GDP’. China’s growth is nearing lows not seen for 30 years but hopes over Brexit and an thaw in US-China trade relations are buoying sentiment. (Reuters)
  • 'Pound's Rally Faces Reality Check as Traders Await Brexit Plan B’. With cross party talks having failed to make progress, there’s mounting concern that last week’s bumper gains for Sterling could prove overdone. (Bloomberg)

Ongoing Brexit confusion is continuing to take a toll on the Pound, extending the losses seen ahead of the weekend break. There is some concern that the political risk isn’t being properly priced into the market, although the prospect of the Labour Party taking power with a minority government remains somewhat distant. Critically, there seems to be little appetite in Westminster for allowing Theresa May to simply run down the clock and trigger a no-deal Brexit at the end of March. The latest plan is that the Prime Minister won’t budge on the proverbial ‘red lines’, but wants to try and renegotiate the Irish border backstop before taking the bill back to MPs for another vote. However, the European Union has already made it clear that the present offer is final, although critically Eurosceptic MPs are coming around to the existing deal on the basis that it’s better than risking no Brexit at all. Theresa May is obliged to update parliament tomorrow of her next steps following last week’s failed vote. With this in mind, Sterling is likely to remain somewhat volatile in the medium-term and could react sharply even to false rumours, let alone hard facts.

With US markets closed today for the Martin Luther King holiday, it could well be a quiet start to the week for currency markets. However, the dominant theme appears to be one of mounting risk appetite. Although the US government remains in a state of shutdown owing to the funding stand-off between Donald Trump and the Democrats, there’s speculation that a breakthrough could be getting closer. The President has apparently rejected the idea of an amnesty for so-called ‘Dreamer’ immigrants, but is instead favouring a broader suite of concessions in a bid to win support for a physical border to be constructed between the US and Mexico.

Ultimately, there’s growing confidence that the shutdown can be concluded, and with equity markets struggling to make progress, this appears to be lending support to the Dollar, even with the dovish signals which have been emerging from the Federal Reserve. The US Dollar seems set to find further support as the week unfolds, with expectations running high that the European Central Bank (ECB) will set a pessimistic tone when it declares its latest stance over monetary policy later this week. Despite some isolated upbeat economic releases being seen from the Eurozone at the start of the year, headwinds continue to build. Any suggestion that fresh stimulus measures will be needed—possibly through the auctioning of some very cheap corporate loans—could have the potential to weigh on the Euro.

GBP/USD

Optimism over political progress being made in the US and profit taking off the back of last week’s bumper gains saw the Pound sell off against the US Dollar ahead of the weekend break. Further positive developments could leave Cable posting fresh losses on the downside.

EUR/USD

Similarly, the Euro came under selling pressure ahead of the weekend break, although it has now recovered the bulk of Friday’s losses. However, the pair does remain towards the lower end of its recent range, and further weakness could follow if the ECB sets a dovish tone later in the week.

GBP/EUR

The Pound has lost more than a cent from last week’s highs, illustrating the fallibility of any upside for Sterling given the current political situation in the UK. Meaningful progress over Brexit could offer further gains, although the present situation suggests risk remains weighed on the downside.