The UK advantage…

​​​​​​Today's news headlines:

  • ‘UK Brexit bill clears House of Commons after year of gridlock’. Boris Johnson’s Brexit bill passed through the House of Commons last night, ending months of gridlock in Parliament. Johnson’s election majority meant the bill was almost guaranteed to pass the vote, with members voting 330 to 231 in favour of the Withdrawal Agreement Bill. (Bloomberg)
  • ‘China bond investors battle to claim cash after defaults’. Rising defaults are deterring Chinese bond investors in the world’s second-largest economy. Investors are usually able to scrap some cash flow from distressed debt, but last year only 13% of defaulted borrowers paid any cash to investors down from 46% in 2016. Another big deterrent is that Chinese courts often rule in favour of defaulters, rather than investors who are owed money. (Financial Times)

Calm waters reveal a mixed outlook

Since the EU Referendum, the Pound’s valuations have been primarily determined by perceived political risk around Brexit and not so much by underlying fundamentals. It has been our contention for some time now that once Brexit is finally behind us, we’ll view the underlying economic data with fresh eyes and probably not like what we find there. 

According to a Bloomberg Economics estimate, Brexit has already cost 130 billion Pounds which is likely to reach 200 billion by the end of 2020. This rather dire view of economic fundamentals appears to be shared by Bank of England Chief Mark Carney, who spoke yesterday. Commensurate with slow growth and below-target inflation, the Monetary Policy Committee is weighing an addition of monetary stimulus to support the economy until returning confidence becomes more robust. 

Bottom line: Boris Johnson has less time to make progress than it may have seemed a few days ago. The PM’s meeting with EU’s Ursula Von der Leyen appeared productive on the surface, but it quickly became apparent their positions are very far apart at this early stage of negotiations. Slack EU growth provides a disincentive for protracted debate, but the UK is apparently under similar pressures. So much for the UK advantage.

GBP/USD

Yesterday, Cable posted two-week lows of 1.3014 after Mark Carney suggested the Bank of England has the equivalent of 250 basis points of monetary easing in its locker. The pair recouped losses for the remainder of the session and opens today close to where it began on Monday. The trade-weighted Sterling Index remains supported by its 50-daily moving average as the Dollar Index edges towards potential resistance at its 50 and 200-daily moving averages. This combination could support the pair as we end the week, even with US Non-Farm Payrolls out this afternoon.

GBP/EUR

The currency-cross remains in a tight range having recovered most of yesterday’s losses caused by dovish comments from Bank of England Governor, Mark Carney. A lack of economic data today could mean a quiet trading session as the pair ends the week near where it began. A large volume of Options are due to expire at the 1.1765 level, which could anchor the pair as we reach the 3pm UK time expiry.

EUR/USD

The common currency continues its slide as we open today’s session below the 1.11 figure. Yesterday, the pair tested the big number twice but managed to close the session above the level. US Non-Farm Payrolls data is due at 1:30pm which could create some intra-day volatility, potentially securing a close above or below the 1.11 mark. The trade-weighted Euro Index remains at the bottom of its two-month trading range while the Dollar Index climbs towards potential resistance at the 50-daily moving average just 0.1% away.