Historic meaningful vote
Theresa May’s speech revealed little new information and an EU letter offering “Northern Irish backstop reassurances” had little impact in swaying political opinion. The Pound was kept afloat on expectations that a ‘no-deal’ Brexit would be blocked by parliament.
Sterling spiked higher just before the close following reports that the European Research Group of Conservative MPs could support the proposed deal, as political manoeuvring reached fever pitch. This pushed above 1.2900 against the Dollar, two-month highs, while climbing past 1.1235 against the Euro, seven-week highs. Despite fading slightly, Sterling secured net gains on the day.
There are still very strong expectations that the government will lose today’s vote, although it is currently resilient given a high number of alternative outcomes and expectations. The strong parliamentary opposition to a ‘no-deal’ outcome may trigger a delay to Article 50 should it become more likely. The Pound could gain on speculation of another referendum, but will likely suffer if a no-confidence vote is called.
The US dollar is weaker against the Pound, and similarly struggling against the Euro. The Dollar remains vulnerable to the ongoing shutdown in the US government and continued trade tariff war with the Chinese.
In an interview on Monday, former Fed Chair Yellen stated that it was possible that the US had already seen the last interest rate increase in the current cycle. The comments reinforced expectations of a dovish Fed policy during 2019 and expectations that there would be no rate hikes during the first half of 2019 and potentially not this year.
Federal Reserve Vice-Chair Clarida reiterated that the central bank can be very patient this year and that some global data had been softening. The Fed won’t hesitate to adjust monetary policy or the balance-sheet reduction if required, although he also stated that Fed policy was not a headwind for the economy.
Yesterday was not the easiest day for the Euro. Initially, there was an expectation that the UK would manage to avoid a no-deal Brexit. This lent some support to the currency which increased to 1.1475 versus the Dollar from the 1.1450 level. However, a strong performance from the Pound offset these gains.
In the data we saw yesterday, EU industrial production took its sharpest decline in three years by falling 1.7% in November. This, combined with weak data out of France and Germany, caused the Euro to drift lower.
Today sees CPI numbers out of France and Spain, but President Draghi’s speech will be of interest to see how he handles the recent weak data from the region. However, all eyes will be on the Brexit vote in the UK, with the majority of volatility being caused by this.
Data to watch:
24H GBP UK Parliamentary vote on Brexit
07:45 EUR Consumer Price Index (EU norm) (YoY) (Dec) (France)
13:30 USD Producer Price Index ex Food & Energy (YoY) (Dec)
N/A NZD GDT Price Index
15:00 EUR ECB President Draghi’s Speech
23:50 JPY Machinery Orders (MoM) (Nov)
23:50 JPY Machinery Orders (YoY) (Nov)