Pound’s next bout of volatility may have to wait
Today's news headlines:
- 'Theresa May faces defeat in no-deal Brexit vote’. Today’s motion up for debate appears rather benign but has the potential to flush out the opposition for taking a no-deal Brexit off the table. However, the vote scheduled for February 27th looks increasingly significant as cross-party support threatens to wrestle control away from the government. (Financial Times)
- 'Xi will reportedly meet with Mnuchin, Lighthizer as US and China try to strike a trade deal’. The Chinese President is set to meet with the high-level US delegation in Beijing this week in a bid to push through trade reform. A cordial atmosphere would lift risk appetite and have the potential to weaken the US Dollar. (CNBC)
- 'U.S. posts another budget deficit as tax revenues sag’. The $14 billion deficit for December was $3 billion worse than had been expected, and despite a strong underlying economy, revenues continue to fall as a result of tax policy revisions. (Reuters)
There’s no escaping the UK’s attempts to divorce the European Union. Today’s debate in parliament looks set to be something of a sideshow, with events in two weeks’ time more likely to be the flashpoint. If Conservative MPs aren’t allowed a free vote, a swathe of ministerial resignations have been threatened, while failure for Jeremy Corbyn to back a second referendum has the potential to see a breakaway by centrist Labour politicians. Some Sterling volatility may be seen off the back of today’s posturing, but what lies in store at the end of the month has the potential to be rather more significant.
Donald Trump’s pro-business leadership resulted in a series of tax cuts for US businesses. The idea was that lower tax rates would stimulate investment to create a bigger economy, in turn producing more tax income. This isn’t paying off as yesterday’s budget deficit figure showed. Failure to close this gap means the US government needs to borrow more to fund its day-to-day operations, and therefore, makes these borrowings more expensive. In the longer-term that could put fresh pressure on US economic growth, in turn, contributing to a weaker US Dollar.
The Pound saw a volatile session against the US Dollar yesterday as weak inflation data offset hopes of a Brexit delay. The pair continues to plot a downward path, with USD strength off the back of US-China trade talks adding pressure.
The Euro saw its biggest one-day loss against the US Dollar since the start of the year yesterday, with fears over the state of today’s Eurozone Gross Domestic Product (GDP) release weighing. Any indication that the European Central Bank (ECB) needs to accelerate stimulus measures will have the potential to add further downside pressure.
Sterling may be short of supporters amid the ongoing Brexit uncertainty, but the prospect of Eurozone GDP data disappointing is keeping the Euro under pressure, too. As a result, the pair continues to trade in a narrow channel, but a meaningful breakout in either direction could soon emerge.