In the first several weeks of the year, it is invariably the case that the market is searching for an enduring theme to point the way forward for the year. At the close of 2019, the hope was the end of US-China trade escalations that would result in a benign environment in which a bottoming global economy could return to growth. The reality has proved to be different.
Middle-East tensions have returned as a political concern, and Donald Trump’s assassination of an Iranian General isn’t the only problem. Over the weekend, after Berlin Peace Talks failed to reach a deal, the Libyan National Army under the leadership of Khalifa Haftar closed off the nation’s largest oil field. At the same time in Iraq, protests by security guards seeking labour reforms blocked access to Badra field.
Looking slightly closer to home, we have recently commented upon crumbling economic prospects in the UK. Both sectoral survey data and output numbers have been pointing towards a steep decline; only strong employment numbers and healthy consumer data has really kept the UK on a modestly positive growth path.
Unfortunately, on Friday, UK Retail Sales data indicated its fifth consecutive decline since August of last year. Moreover, last month's figure was also revised lower, undermining hopes that a Brexit related business investment slowdown wouldn’t impact the consumer. It seems the pressure on Boris Johnson to agree on a trade deal and end uncertainty is ratcheting up each day.
Bottom line: Over the weekend, UK Chancellor of the Exchequer, Sajid Javid, indicated that the UK wouldn’t be seeking alignment with the EU, saying ‘we will not be a ruletaker’. If the goal is to accomplish a trade deal by the end of 2020, the most probable path to success appeared to start with a short-term mirror in EU terms. In some sense, this resets the negotiating calculus, which took the existing arrangement and then looked at ways to include/exclude elements. The downside of starting over is that it is also likely to take much longer than 11 months to complete. There are no signs of a durable theme, but the initial days of 2020 point towards a continuation of political and economic deterioration.
Overnight, the pair continued Friday’s downward trend, erasing last week’s gains. Cable opened this week below the 1.30 level as comments from Chancellor Javid heightened concerns over UK regulations post-Brexit. The trade-weighted Sterling Index remains range-bound as the US takes a public holiday today. Light liquidity may cause intra-day volatility, particularly around hourly fixings.
The currency cross remains in a tight range, opening London’s session around the 1.17 level. Last week’s close below the 50-daily moving average may provide downward pressure for the pair in today’s trading, which is light on liquidity due to a US holiday. The Euro Index has reached the bottom end of its two-month range, so a rebound may be expected, providing further downward pressure on GBP/EUR.
This morning, the common currency opened London’s session below the 1.11 level as US Dollar strength persists. On a trade-weighted basis, the Dollar trades just shy of its 200-daily moving average, which may provide resistance for the Greenback. Also, the Euro Index currently trades at the floor of its two-month trading range, meaning further losses for EUR/USD could be limited.