Parliament Rejects PM's Brexit Deal, Sterling Gathers Strength
What’s been happening?
Pound Sterling – UK Markets
The pound sterling slumped to its lowest day in ten days against the dollar after the Parliament voted down Prime Minister Theresa May’s Brexit deal with a majority of 230. However, following the knee-jerk market reaction, the currency gathered strength and erased its daily losses vs the dollar while rising to its strongest level against the euro in nearly six weeks.
Following the vote, PM May argued that the vote showed nothing about what the Parliament supports and added that the government would approach further Brexit discussions in a constructive way. Commenting on the outcome, "I take note with regret of the outcome of the vote in the House of Commons this evening. I urge the UK to clarify its intentions as soon as possible. Time is almost up." European Commission President Jean-Claude Juncker tweeted out. As expected, opposition leader Jeremy Corbyn called for a vote of no confidence in the government, which will take place on Wednesday. Later in the day, PM May’s spokesman told reporters that the PM believed she will win the confidence motion while DUP leader Foster stated that they would give the government the space to set out a plan to secure a better deal, voicing their support for the PM.
US Dollar – US Markets
The data published by the U.S. Bureau of Labor Statistics on Tuesday revealed that the PPI on a yearly basis stayed unchanged at 2.5% in December to match the previous reading and analysts’ estimate. However, the core PPI, which excludes volatile food and energy prices, came in at 2.7% to fall short of the market expectation of 2.9%. Meanwhile, the New York Fed’s monthly Empire State Manufacturing Survey showed that the business activity in the manufacturing sector expanded at a slower pace than anticipated with the general business conditions index slumping to its lowest reading since mid-2017 at 3.9 in January. Finally, the IBD/TIPP Economic Optimism Index edged down to 52.3 in January from 52.6 in December. “The government shutdown helped drag the overall index lower as confidence in federal economic policies fell to the lowest point since June,” Investor’s Business Daily said. “The six-month economic outlook gauge remained in pessimistic territory, edging up only slightly from December's two-year low.” Despite the gloomy data, the US Dollar Index posted daily gains for the third time in the last four days.
Meanwhile, Dallas Fed President Robert Kaplan said that the government shutdown could hurt consumer spending by leaving 800,000 workers without a paycheck. Touching on the policy outlook, “Given the long list of risks, the Fed would be wise to wait on any further policy action,” Kaplan argued.
Euro – European Markets
The shared currency remained under pressure and weakened against its major rivals as the day’s data caused fears over an economic slowdown in the area to resurface. The Destatis on Tuesday announced that the real GDP in 2018 expanded at 1.5%. “The German economy thus grew the ninth year in a row, although growth has lost momentum. In the previous two years, the price adjusted GDP had increased by 2.2% each,” the report read. Other data showed that the trade surplus in the euro area rose to €15.1 billion in November from €13.5 billion in October.
While speaking before the European Parliament later in the day, ECB President Mario Draghi noted that the recent economic developments had been weaker than expected. “Uncertainties, notably related to global factors, remain prominent. So there is no room for complacency,” Draghi added. “A significant amount of monetary policy stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term.”
What’s coming up?
UK: The UK’s Office for National Statistics will publish the inflation report, which will include the consumer price index, producer price index, and retail price index data. Bank of England Governor Mark Carney is also scheduled to deliver a speech. Later in the day, markets will pay close attention to the no confidence vote in the Parliament.
US: Import/export price index, NAHB Housing Market Index will be released on Wednesday. Furthermore, the Fed will publish its Beige Book.
EU: Inflation data from Germany and Italy will be featured in the European economic docket.