Brexit referendum 2: denied
Thursday’s Sterling rally finished abruptly on Friday morning following reports that Theresa May had failed to obtain more concessions on the withdrawal deal. With time running out, investors fear a no-deal Brexit and heavy selling pressure resumed throughout the morning. GBPUSD has fallen nearly 6% so far this year, and we could see the pair revisiting recent lows. Sterling slumped to 1.2540 against the Dollar before finding support. The Pound spiked up 50 pips against the Euro, hitting 1.1157 before collapsing and surrendering all gains.
Theresa May will be holding more talks in coming days to obtain concrete assurances that the Irish backstop will be temporary but has rejected the idea of a second referendum despite reports of her advisors meeting to discuss this.
The UK will have to wait until Wednesday for the first economic data, inflation figures. Thursday sees the GDP data release and the Bank of England (BoE) is also meeting. The BoE meeting is likely to be a non-event until the Brexit clouds clear.
The US Dollar Index is up 0.5%, near a five-week high, supported by incoming better-than-expected retail sales numbers. The Greenback is on course to close the week near a 20-month high against the G-10 currencies.
The currency market was giddy at the back end of last week after data out of China signalled a stalling economy and reigniting fears of a global economic slowdown. Growth in Chinese industrial product slowed to 5.4%. Chinese consumers are reportedly spending less, with retail sales at its lowest level in 15 years and business investment was flat at 5.9%, which in turn played a big part in aiding the USD.
Big moves can be seen later in the week after Wednesday’s FOMC rate decision. We could see new highs for the Dollar if the US central bank sounds less dovish than expected, forcing markets to scale back expectations of a rate hike pause in 2019. The markets are expecting the Fed to hike rates by 25 basis points and signal a “wait and see” approach for 2019.
Data on Friday backed up the European Central Bank’s (ECB) dovish statement on Thursday, cutting inflation forecasts, with the market feeling that raising interest rates in 2019 might no longer happen. Off the back of this news, the single currency dipped slightly and struggled to recover against the Dollar.
There were weaker-than-expected German and Eurozone PMI prints for December, highlighting a slowdown in manufacturing and services. This pushed the Euro to below 1.1300 versus the Dollar after strong data out of the US meaning the pair finished on its lowest weekly close since June 2017.
Monday sees Eurozone CPI numbers released, which will be the most significant news of the day. Wednesday sees the Fed’s interest rate decision, with the same figures due out on Thursday for the UK.
Data to watch:
10:00 EUR Consumer Price Index – Core (YoY) (Nov)
10:00 EUR Consumer Price Index (MoM) (Nov)
10:00 EUR Consumer Price Index – Core (MoM) (Nov)
10:00 EUR Consumer Price Index (YoY) (Nov)