British Pound Extends Rally on Hopes of Brexit Delay
What’s been happening?
Pound Sterling – UK Markets
Several news outlets on Wednesday reported that the Labour Party was planning to back a proposal presented by one of its members, Labour MP Yvette Cooper, to delay Brexit until, at least, the end of the year and force the government to rule out a no-deal Brexit. In the meantime, while speaking at a think-tank even, Conservative lawmaker Jacob Rees-Mogg argued that the government should suspend the Parliament if necessary to avoid a no-deal being blocked. “No deal cannot be taken off the table by lawmakers if the government is determined to stop them,” Rees-Mogg explained and added: “It would be constitutional outrage if Brexit was reversed.” With markets assessing that development as the UK having more time to come up with a Brexit solution, the pound sterling gained value and rose to its highest level in more than two months against both the dollar and the euro. On the other hand, British Trade Secretary Fox urged businesses to prepare for a no-deal Brexit amid the lack of progress on the Irish border issue.
Meanwhile, in its latest Industrial Trends Survey, the Confederation of British Industry (CBI) noted that manufacturing sentiment continued to deteriorate to start the new year with the headline Orders Index slumping to -1 in January from 8 in December compared to the market expectation of 5. “Business optimism in the quarter to January fell sharply with sentiment regarding export prospects dropping at the fastest pace since the financial crisis. And manufacturers’ concerns that political and economic conditions abroad were likely to limit their future ability to obtain export orders were at their highest level since the immediate aftermath of the EU Referendum,” the CBI said in its publication.
US Dollar – US Markets
The dollar struggled to preserve its strength against its major rivals on Wednesday as the 10-year T-bond yield lost more than 1% from session highs in the second half of the day. The data published by the Federal Housing Finance Agency reported that house prices in the U.S. rose 0.4% in November to match October’s revised reading. Other data released by the Federal Reserve Bank of Richmond revealed that the business activity in the Fed’s Fifth District’s manufacturing sector contracted with the headline Composite Index coming at -2 in January.
In an interview with CNBC, President Trump’s outside China advisor said that he didn’t expect a breakthrough in trade talks with China. On the other hand, President Trump told reporters that the U.S. was doing well in trade negotiations.
Euro – European Markets
The shared currency recorded modest gains vs the dollar while remaining weak against the British pound on Wednesday. The Flash Consumer Confidence Index published by the European Commission improved to -7.9 in January from -8.3 in December. “In December 2018, the Economic Sentiment Indicator (ESI) decreased markedly in both the euro area (by 2.2 points to 107.3) and the EU (by 2.0 points to 107.6)," the EC noted in its press release.
Earlier in the day, commenting on the economic slowdown in the euro area during an interview with Bloomberg, European Economic Commissioner Pierre Moscovici argued that “economic clouds” were due to external factors and added that he saw robustness in the eurozone.
What’s coming up?
UK: There won’t be any macroeconomic data releases from the UK and markets will be paying close attention to political developments.
US: Weekly initial jobless claims will be the first data release of the day in the U.S. before the IHS Markit published its preliminary PMI reports for both the manufacturing and the service sector.
EU: The European Central Bank will announce its policy rate on Thursday, which is expected to stay unchanged at 0%. The bank is also seen keeping the deposit rate steady at -0.4%. After the ECB publishes its policy statement, ECB President Mario Draghi will deliver his remarks on the policy outlook in a press conference. Furthermore, the IHS Markit will be releasing PMI reports for the eurozone, Germany, and France.