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Politics in focus on both sides of the Atlantic

Today's news headlines:

  • ‘Chinese factory activity registers 2-year low’. Beijing’s bid to reduce debt has been weighing on domestic demand. (Reuters)
  • ‘Pound traders glued to desks as Brexit vote meets witching hour’. A late vote on Tuesday could match with period of thin GBP liquidity, exacerbating volatility. (Bloomberg)
  • ‘Former Nixon WH lawyer: Congress will have “little choice” but to begin impeachment proceedings’. Friday evening court filing involving Trump’s former lawyer could force the issue. (CNN)

It’s set to be a pivotal week for Brexit and the Pound, with two key events due in the next 48 hours. Today the European Court of Justice will rule whether Article 50 can be revoked, putting the UK back in the European Union and essentially ignoring all that has happened over the last 30 months. Confirmation it could be revoked may offer the Pound a modest lift as it provides certainty over one possible path of progress. Tomorrow will see the final day of Brexit debate in Parliament ahead of MPs voting on the proposed divorce deal. Expectations remain that Theresa May will face a humiliating defeat, and this could prove damaging for Sterling. It could also open the door for Labour to try and form a minority government and a leadership challenge against Theresa May, presenting a double dose of uncertainty that could easily cause Pound depreciation. The one salvation may be the idea that with the currency now so depressed, there’s little left on the downside. However, as has been noted, the vote could land on top of thin volumes and exacerbate volatility; some reports suggest a swing of 6.0% in either direction could be seen on Tuesday night.

Political risk is likely to be high on the US agenda this week too. Court papers filed late on Friday night are by many accounts paving the way for Congress to begin impeachment proceedings against President Donald Trump. Although this has been a recurring point over the last two years, the fact that the Democrats won a majority in the House of Representatives last month and with the new posts filled from January, such a process would be far easier to execute. The DXY Dollar index has come off a little since Friday night, but further weakness could be seen. This repeats last week’s theme of helping prop up an otherwise beleaguered Pound.

In comparison, the Eurozone could have been left looking like a bright spot, but another weekend of protests across France—the currency bloc’s second-largest economy—now seems likely to have a meaningful impact on fundamentals. President Macron is set to issue a response today, and whether it involves tighter restrictions against protests or some kind of economic olive branch, it will come at a price. Compared to the extreme levels of volatility forecast for the Pound and the impact a Presidential impeachment could have on the Dollar, this situation is a far lower risk, but still adds another layer of confusion to markets which are already looking unpredictable.

Fundamentals are relatively thin on the ground today, but UK Gross Domestic Product (GDP) data for October is due for release at 9.30am GMT. Some upside is expected, although Brexit uncertainty already capped the Services Purchasing Managers’ Index (PMI) last week. With this being such a large part of the UK economy, today’s number could see talk of the country slipping towards recession being reiterated.

GBP/USD

The Pound rallied off Friday’s lows, supported by the latest turn of events from the US regarding the possible impeachment of Donald Trump. However, it’s difficult to escape the fact that GBP/USD has been under sustained pressure since April.

EUR/USD

Given the fresh round of uncertainty from the US, combined with the ongoing commitment of the European Central Bank (ECB) to push for normalising monetary policy, the Euro has added around three-quarters of a cent since late on Friday. The rally may have stalled, but the common currency could prove increasingly popular ahead of the year-end.

GBP/EUR

The Pound continues to slide against the increasingly popular Euro. Significant volatility may be forecast given tomorrow’s Brexit vote, but looking at the political situation right now, it’s very difficult to see the government coming out of this in good shape. Sterling remains vulnerable.