British Pound Weakens as EU Rules out Backstop Renegotiation
What’s been happening?
Pound Sterling – UK Markets
The British pound suffered heavy losses against its major rivals on Tuesday even though UK lawmakers accepted the Brady amendment, which seeks to replace the backstop with alternative arrangements to avoid a hard border, with a majority of 16. Earlier in the day, several EU officials reminded that the withdrawal agreement was not up for renegotiations. Minutes after the Brady vote, a spokesman for European Council President Donald Tusk stated that the backstop was a part of the withdrawal agreement and would not be renegotiated. “The withdrawal agreement is and remains the best and only way to ensure orderly Brexit," the spokesman added.
Furthermore, lawmakers voted down the amendment tabled by Yvette Cooper that looked to extend the Article 50 until the end of 2019 if PM May were to fail to secure a deal by the end of February and further weighed on the pound sterling.
Speaking in the House of Commons, PM May As the next step, PM May said that the House has reconfirmed the view that it did not want a no-deal Brexit. “Negotiations with the EU will not be easy,” May noted. “It is now clear that there is a route that can get a sustainable majority in this House. We will seek legally binding changes to the withdrawal agreement.”
US Dollar – US Markets
The US Dollar Index fluctuated in a tight range below the 96 mark on Tuesday to suggest that investors are staying on the sidelines ahead of tomorrow’s critical FOMC announcements. The monthly report published by The Conference Board on Tuesday showed that the consumer sentiment continued to deteriorate in January in the U.S. with the headlines Confidence Index dropping to 120.2 from 126.6 in December. Commenting on the data, “The Present Situation Index was virtually unchanged, suggesting economic conditions remain favorable,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board and added: “ Shock events such as government shutdowns (i.e. 2013) tend to have sharp, but temporary, impacts on consumer confidence. Thus, it appears that this month’s decline is more the result of a temporary shock than a precursor to a significant slowdown in the coming months." Meanwhile, according to the S&P Dow Jones Indices, the U.S. National Home Price Index rose 5.2% on a yearly basis in November, down from 5.3% recorded in October.
In addition to the FOMC meeting, markets will be paying a close attention to the two-day trade talks between senior U.S. and China officials that will start in Washington on Wednesday. Citing sources familiar with the negotiations, Nikkei on Tuesday reported that China was prepared to make major concessions this time with an intention to bring the trade conflict to an end.
Euro – European Markets
The shared currency stayed virtually unchanged on a daily basis against the dollar and continued to erase the losses it suffered vs the pound sterling. while posting modest gains vs the pound sterling. The data from Italy showed that the Producer Price Index declined by 0.5% on a monthly basis in December. While speaking at the Peterson Institue in Washington on Tuesday, Italy’s Economy Minister Giovanni said that Italy wanted to stay in the single currency and added that the government was determined to reduce its high debt. "At the moment I don't see the need to adopt a more stringent or expansive budget policy," Tria added.
What’s coming up?
UK: The Bank of England will publish consumer credit, net lending to individuals, and mortgage approvals data on Wednesday.
US: ADP private sector employment report and pending home sales will be featured in the U.S. economic docket ahead of FOMC’s monetary policy announcements. Although markets don’t expect any changes to the policy rate, Chairman Powell’s comments could provide new clues regarding the near-term monetary policy outlook.
EU: The European Commission will release the latest Business and Consumer Survey, which will include consumer confidence, services sentiment, economic sentiment, industrial confidence, and business climate indexes.