War of the words

Today's news headlines:

‘Sajid Javid sets March 11 date for Budget to “level up” UK regions’. Today, Chancellor Sajid Javid will announce the new Budget date—11th March in Manchester. The Budget is expected to align with the government’s latest pledge to ‘level up’ the economic performance of struggling towns in the UK, particularly in Northern communities. However, Javid will face tight constraints on day-to-day spending. (Financial Times)
‘Iran says its retaliation will be “historic nightmare” for US’. Iran is assessing 13 different ways to retaliate against the US following the killing of Soleimani, the Iranian General in charge of foreign operations. Iran has claimed the weakest of its options would mark a ‘historic nightmare’ for the US. (Bloomberg)

More bark than bite

Following the assassination of Iranian General Qassem Soleimani, the war of words has escalated, but actions remain tempered. The US Administration has sent three more warships into the Persian Gulf at the same time that Donald Trump has threatened that any Iranian retaliation would result in a bombing of Iranian cultural sites. These are strong words, but markets are viewing this a bit more pragmatically; Brent Crude which had risen through 70$ per barrel on geopolitical concerns retreated overnight.

In the UK, the long-awaited conclusion to the withdrawal agreement is upon us. Over the next three days, the House of Commons is set to ratify the article in preparation for passage through the House of Lords. At the same time, Johnson’s team will declare their approach to upcoming trade negotiations. While this all seems quite procedural— thankfully you might say—there is a great deal of substance to be gleaned from the sum of these events. We’ve previously discussed the shifting balance in Brexit and trade negotiations as a result of declining EU economic prospects and the size of Johnson’s majority. Mostly we are watching to see how strongly the PM will play his strengthened hand; a hard-line tack might result in more animosity and a longer timeline for completion.

Bottom line: The risk-off tone is fading, but Dollar strength is likely to persist given the potential for a sudden resumption of aggression. In the short term, we are watching the price of oil and gold—the latter a safe-haven asset during times of instability—for indications of geopolitical risk. The smooth progression of the Brexit withdrawal agreement is likely to provide some modest support for the Pound, but more focus will be on the initial stages of the trade negotiations which is the next hurdle in this long-running drama.

GBP/USD

Yesterday, Sterling demand pushed the pair above the 1.31 level following stronger-than-expected UK Services PMI data and managed to close above the key level. Sterling pushes higher again this morning, testing the 1.32 figure. With little in the way of UK data today, the focus is on this afternoon’s US supply-side data which risks interfering with Sterling upward pressure.

GBP/EUR

Both the Euro and the Pound faced increased demand yesterday, but Sterling pressure was the overriding force and continues to be this morning. The currency cross tested the 1.18 level on the London open. This morning’s European inflation data may support the pair along with the 50-daily moving average, which currently sits at 1.1725.

EUR/USD