Members of Parliament return to work today following the Christmas break, and this will serve to push the Brexit debate back into focus. Aside from last week’s flash crash, the Pound has had a relatively easy ride in recent weeks, with talk of Brexit remaining on the sidelines. However, the situation changed in the weekend media, and with debating over the Brexit plans set to resume, along with the potential to see some fresh clarification over the contentious Irish border backstop issue, Sterling volatility is likely to increase in the near-term.
Critically, there are reported plans afoot by a number of MPs to start blocking other items of legislation this week, such as parts of the finance bill. This would starve the government of money in the event of a no-deal Brexit, so concerted efforts like this to engineer a route away from the worst-case scenario may find a small amount of support. The Prime Minister has also confirmed that the vote by MPs will take place at the start of next week.
Friday proved to be the proverbial game of two halves for the US Dollar, with an impressive Non-Farm Payrolls reading bolstering the currency, before dovish comments from Fed Chief Jerome Powell more than countered the upside. Despite the booming employment situation, Powell was keen to stress that he would be patient with monetary policy. There is no predefined path for interest rate hikes in 2019 and specific reference to the ‘muted’ inflation readings of late was also made.
Eurozone Retail Sales data for November is set to be released at 10am GMT. This number can expect to be closely followed, given the tightening stance over monetary policy by the European Central Bank (ECB). Expectations are for a significant fall to be seen here, but the print should remain in positive territory. However, any reading showing contraction could raise fresh questions over the ECB’s pace of attempting to normalise monetary policy and have the potential to pressure the Euro as a result.
The ISM Non-Manufacturing Purchasing Managers’ Index (PMI) reading from the US is expected at 3pm GMT, and despite the dovish tone from the Fed before the weekend break, forecasts suggest there should be little cause for concern. A reading well above the break-even 50.0 level is forecast, with any reports of progress in the US-China trade talks likely to prove far more influential in terms of directing the Dollar. Positive developments between the two nations will have the potential to drive risk appetite across the board and help further weaken the US Dollar as a result.
There has been little movement for the Pound against the US Dollar since before the weekend break. As noted, US employment data drove USD gains before a dovish tone from the Federal Reserve reversed them. Although Sterling does stand to benefit from the improved risk sentiment which could be seen from the China trade talks, Brexit is likely to limit upside potential.
After Friday’s volatility, the Euro is currently slightly ahead of the US Dollar, although weakness is creeping in off the back of just-released German Factory Orders data which has posted well below expectations. Again, any uptick in risk appetite following positive developments in trade talks should bolster the common currency.
Euro weakness is helping lift the Pound right now following disappointing data from Germany, but upside for Sterling could well be limited in the near-term. With Brexit back on the agenda and the market still largely being of the opinion that GBP is very difficult to trade right now, sharp bouts of volatility should probably be expected in the near-term. With GBP/EUR sitting close to one-month highs, there’s certainly scope on the downside, too.