16 Jan 2019: Sterling steady as May loses historic vote

Sterling steady as May loses historic vote

January 16th: Highlights

  • Traders on the sidelines as Brexit chaos continues
  • Dollar gaining support from Interest rate differential
  • Eurozone inflation to keep ECB on the sidelines

Government facing confidence motion following Brexit vote

As had been widely expected, the UK Government’s draft agreement with the EU on the terms by which the UK will depart the EU in a couple of months time was heavily defeated in Parliament last evening. The margin of 230 votes is unprecedented in Parliamentary history illustrating perfectly that neither leave or remain favouring MPs saw the deal as the best that could be achieved.

In a speech immediately following the vote, Prime Minister Theresa May invited the Opposition to table a motion of no confidence in her Government, an invite which was swiftly accepted.

A vote of no confidence is unlikely to see the Government fall since, despite divisions over Brexit, Government MPs backed by the Irish Nationalist DUP will support their leader to avoid a General Election. This is, of course, not a certainty but the most likely outcome of today’s debate and vote.

Liquidity is the lifeblood of any market and last evening it proved to be ample, as before during and after the vote, Sterling was volatile but didn’t experience any unusual or violent moves in either direction. There was a certain amount of liquidation of short positions by traders who had seen enough and decided that “discretion was the better part of valour” and squared up ahead of today’s debate.

The pound traded in a relatively wide 1.2917/1.2668 range but closed at 1.2883 just sixteen pips higher than its opening level.

The question remains, where does the Government go from here as a no deal departure from the EU, favoured by no faction within Parliament, beckons?

Government Ministers were saying last evening that since there is only minority support for no deal that there must be a deal of some kind that will receive the support of the majority of MPs.

However, Brussels has already dismissed a reopening of negotiations with EU Council Leader Donald Tusk ruling out any further concessions. Traders face yet more uncertainty over the next days/weeks but the while market remains orderly positioning will remain fairly neutral.

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Dollar supported by rate differential as the dust settles

When there are no new factors or an obvious path, the financial markets tend to revert back to “tried and tested” formulas to decide on the strength, or otherwise, of a currency.

The dollar remains supported by the interest rate differential between it and other G7 countries despite the likelihood of no further rises in short term rates in the near or medium term.

Long term yields on Government debt are also favouring the greenback although if the Government shutdown continues this may turn into a negative. It is difficult to gauge the economic effect of the shutdown and therefore its effect on the dollar as it is very much a domestic U.S. event.

Weaker than expected data for producer prices was released yesterday with “factory gate” costs falling 0.2% in December. This is a well-known precursor of future consumer level inflation and the data points towards benign price increases going forward.

With China “apparently” making efforts to head off a downturn in its economy and hopeful noises being made by both sides in the ongoing dispute over trade, the dollar may see a rally back towards the top of its recent range. The dollar index reached a high of 96.26 yesterday before closing a little lower at 95.95. It remains supported around 95.20 but there is residual interest to sell between 96.30 and 96.50.

Benign inflation to keep ECB on sidelines

As the Eurozone slides slowly but decisively into recession, price data remains benign which will ensure that any rate increase from the ECB is still many months away.

As individual states announce inflation rates for December, which are almost uniformly falling month on month, the pan-Eurozone data which will be released tomorrow, is likely to remain at 1.6% year on year.

Data for German economic growth showed that GDP fell to 1.5% in 2018, its lowest level for five years. This added to the gloomy picture of the prospects for any recovery in the region as the fudged Italian budget agreement and the continued social unrest in France weigh on sentiment.

The approval rating of French President Emmanuel Macron had plummeted to 23% in December as he struggled to find a way to calm the demonstrations which started with his decision to increase the fuel tax, a decision that has long since been reversed. He has introduced other measures to quell the anger of those who elected him based upon a “new deal for all”.

He has increased the minimum wage, cut the tax on overtime (both of which will have a detrimental effect of France’s budget deficit) and encouraged large firms to pay bonuses early.

Despite the negative economic effect of these measures, Macron’s approval rating has risen to 28%, still poor but moving in the right direction.

The single currency had a weaker day yesterday, falling to a low of 1.1381 versus the dollar before recovering a little to close at 1.1413 although it remains on the back foot ahead of today’s data.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”