Political uncertainty likely to dominate week ahead

Today's news headlines:

  • ‘Opposition leader Corbyn says no-deal Brexit would be catastrophic’. The preference that an agreement is reached, rather than a second referendum being held, adds weight to the idea that an orderly exit for the UK from the EU may yet emerge. (Reuters)
  • ‘EU preparing to delay Brexit until at least July’. The European Union is set to publish a letter today giving assurances on the Irish border backstop, showing that concessions are on the table. (The Guardian)
  • ‘Greece's Tsipras on the brink as confidence vote looms this week’. Any shift in power in Athens would add to broader Eurozone uncertainty, but an early election is seen as good news for investors in the country. (Bloomberg)
  • ‘US shutdown sends economy into uncharted waters’. The stand-off is costing the US economy $1.2 billion a week, although lost Gross Domestic Product (GDP) growth should be recovered shortly after the dispute is resolved. (AFP)

On both sides of the Atlantic, political uncertainty is set to provide the backdrop for currency markets in the days ahead. As the US government shut down continues, some 800,000 Federal employees didn’t receive paycheques on Friday, and those businesses reliant on government subsidies aren’t being paid either. At this point, the political stand-off now has a significant impact on the economy. Although economists suggest that any effect on growth will be temporary, it’s the short-term shock that situations like this apply to—readings such as inflation or house prices—that will be of greater concern. Therefore, economic readings in the weeks ahead could prove to be less predictable, resulting in increased levels of volatility for the US Dollar.

There’s no escaping Brexit talk, with Theresa May due to face a pivotal—and potentially ruinous—vote in parliament tomorrow. This remains far from a binary situation, owing to the political risk of a no-confidence motion being tabled by Jeremy Corbyn, plus the raft of scenarios which could be mapped out. The prospect of seeing a no-deal Brexit on March 29th may be diminishing, which has the potential to lend some temporary support to the Pound, but there’s no shortage of confusion as to what may happen next. Sterling can expect to see heightened volatility in the build-up to tomorrow’s vote and assuming the government lose, for some considerable time after.

Middle East politics are also being pushed to the forefront right now, with the US currently hunting out local support for its withdrawal of troops from Syria. The cautious tone over interest rate policy which has been seen from the Federal Reserve since the start of the year, combined with the short-term economic drag of the US government shut down are two factors that have the ability to weigh on the Dollar. However, any prospect of an escalation of conflict in the Middle East would have the potential to bolster the US Dollar as its safe-haven allure drives buying support. Developments may take some time to come to fruition, but it underlines the idea that USD weakness may not be all that long-lasting.

GBP/USD

The Pound rose sharply against the US Dollar on Friday amidst speculation that Theresa May will lose tomorrow’s vote, in turn delaying the timing of Brexit. Nothing has emerged over the weekend to suggest that this won’t be the case, helping consolidate gains, at least for now.

EUR/USD

The Euro sold off sharply against the US Dollar on Friday. Concerns over the outlook for the Italian economy are weighing, while news from Greece over the weekend that the coalition government is facing a vote of no-confidence underlines the fact that the EU’s problems are more extensive than simply managing Brexit.

GBP/EUR

Friday saw the Pound benefit both from Euro selling and speculation that the UK’s departure from the EU would be delayed—if it happens at all. As a result, the Pound saw its biggest one-day gain over the common currency since the start of November.