Sterling continues good run as no-deal looks less likely

Sterling has sustained its good run as traders continue to reduce their bets of a no-deal Brexit outcome.

Although there’s still a lot of ongoing Brexit uncertainty – with no agreement on how and when the UK will leave the EU (or if we even will!) – the majority in Parliament are against us leaving without a deal on 29th March. It’s becoming highly likely that Labour will now back an amendment that could stop a no-deal Brexit from happening. Many feel that a so called ‘hard’ Brexit would be a disaster for the Pound and the UK economy.

A no-deal risk premium had been heavily priced into Sterling by traders, but, now that this seems very unlikely, they’ve started to recalibrate their positions according to the reduced risk of this scenario playing out. The odds are now only around a 10% chance of disruptive departure on 29th March.

As a result, the Pound has pushed through some key levels, with the GBP/USD market rate breaking over the key 1.30 level and now trading at a 2-mth high. The GBP/EUR has also moved to a fresh 2-mth high.

We are by no means out of the woods yet regarding Brexit and a lot can still happen. As previously mentioned, however, there is a growing number of market participants that feel the Pound could have a good year providing a no-deal scenario doesn’t play out. The Pound has already moved quite a way this week and might look to take a little break fairly soon until/before we get more news/progress on Brexit.

May hammered in Brexit vote but Pound buoyant

Theresa May’s Brexit withdrawal deal suffered a crushing defeat last night – losing by 230 votes!

A defeat was expected but not one of such scale. The DUP (who prop up May’s government) had already said they wouldn’t support the deal but also 118 Tories rebelled and voted against the deal. She only managed to scalp three rebel Labour lawmakers (and three inds.) which left her massively short of votes.

The pound dropped in the close run up to the vote and immediately after the results were declared. However, this quickly reversed, with the Pound being bought back, in a classic “sell-the-rumour, buy-the-fact” move.

Labour leader, Jeremy Corbyn, promptly called for a vote of no confidence in the government and the vote will happen this evening (around 7pm). Should May’s government survive this, which is expected, then she’ll hold cross-party talks to try and find out how she can get a deal over the line. This will be a major ask because the vote was so far off and the EU are still not flexing.

Although the government have been fairly adamant they won’t extend Article 50, it seems likely they will now need to (unless May can work some magic in next couple of days!)

If Theresa May’s government maintain power, then she will inform Parliament on Monday about her Plan B. This is likely to be re-opening up negotiations with the EU. A rehash of the current deal is still generally the most widely expected outcome for Brexit. There’s a clear cross-party majority on avoiding a no-deal scenario, so she just needs to come up with an idea of how to get them a majority of them together (easy… right?)

Anyway, as mentioned in yesterday’s update, there is a growing sense in the market that a disorderly no-deal is deemed very unlikely (regardless of it being the current default position). This has kept Sterling buoyant even though there’s lots of uncertainty. As a result, and after yesterday’s large swings, the GBP/EUR continues to trade around a 6-week high and the GBP/USD around a 2-mth high.

We will keep you updated with any major developments that could affect the rates.

Sterling poised as May Day is upon us

After being delayed last time around, the vote on Theresa May’s Brexit withdrawal agreement finally happens this evening (voting starting after 7pm).

The deal is widely expected to be rejected by Parliament, however, the course for Sterling is likely to be determined by how the votes come in and what the next steps will be. If May only loses by a small margin then she will be hoping she can get more concessions from the EU and then win on a second vote. A heavy defeat (say over 100 votes) would open up a lot of uncertainty over what happens next. It would be likely they will need to extend the Article 50 departure date, which, although prolongs the period of uncertainty, could also potentially increase the chances of a softer Brexit or no Brexit at all.

Certainly it seems there’s a growing amount of investors that believe the odds of a disruptive no-deal scenario are cooling, as the majority of Parliament appear too concerned about the upheaval it could cause. This has led to some banks (such as BNP Paribas) suggesting that it’s time to buy Sterling, with many feeling the negativity has already been heavily priced into the Pound and therefore there is upside potential.

Nothing is out of the question though and there could still be some last minute twists left in store. One thing for sure is that Sterling volatility indexes remain very high, with the market expecting some swings in the next 24-hrs.

The GBP/EUR currently trades around 6-week highs and the GBP/USD is close to a 2-mth high. Please let us know what you have coming up and whether you would like to place any overnight target levels.

Happy New Year!

Happy New Year!

We wish you a healthy and successful 2019.

We enter the new year in very much the same fashion as we left 2018, with there being no major developments over the holiday period. With the thin market conditions we saw some jumpy trading, however the ranges held out and we are trading around similar levels to where we left off.

The general themes continue into the new year with Brexit dominating GBP sentiment, global trade wars dominating the USD and politics affecting the Euro.

Sterling

Generally, the UK economy held up fairly well last year considering huge uncertainty hanging over us from Brexit. The Pound, however, was hit by this uncertainty and continues to trade towards the bottom of its ranges as we start the new year.

Brexit remains the key focus for Sterling traders and very little has changed in the Brexit saga over the holiday period. With only 3-months to go until our official exit date from the EU, things are likely to heat up a lot over the next few weeks.

A parliamentary debate on Theresa May’s deal with Brussels starts next week, with a vote scheduled for the week of January 14th. In its current shape, her deal is expected to be rejected. However, she’s pushing the EU for further concessions (around the Irish backstop issue) to help her get the deal over the finish line. At this stage it seems the EU are unwilling to budge but it’s often the case with important negotiations that compromises happen last minute. Traders will therefore be ready to pounce on any news.

If May’s deal gets rejected, then uncertainty will remain high and the odds of a no deal Brexit will go up. How much this affects Sterling will depend on how wide the margin on the vote was. If May only narrowly loses the vote, then Sterling losses would be limited on the hope that she might be able to get it through with a second vote. A huge loss (as was expected in December’s delayed vote) would be more damaging for the Pound as we enter a world of unknowns.

The default position would be to just leave without a deal but this is quite unlikely because of the major upheaval it would cause on both side of the Channel and an extension to the Brexit date would be more likely; prolonging the uncertainty and negotiations (sorry…I know!). The other options are a second referendum, which analysts are generally giving odds of around 40%, or a general election has odds just under this. How these odds shift will dictate how well the Pound performs moving forward.

Euro

The Euro has been under pressure in the second half of 2018 following the Fed’s ongoing rate hikes, Brexit and the Italian budget dispute. Euro-zone growth and inflation levels dropped as the year went on which led to the ECB adopting a renewed cautious approach. 2019 looks set to be another testing year for the single currency.

The primary question will be whether the Euro-zone will go into recession this year. Certainly the trend in growth has not been good and even the powerhouse Germany has been showing signs of a slowdown. Traders will be closely watching the upcoming final quarter 2018 GDP figures (released 31st January) to see if a contraction has started.

Political issues are the biggest explanation for this reduced performance in Europe. The Italians elected an openly euro-skeptic government and they came to loggerheads with the EU over managing their debt levels. Although a compromise was reached towards the end of the year, this story is unlikely to disappear and Italy remains a risk to the region.

The Italian economy is currently suffering from a mix of low growth and rising debt. It recorded zero growth in Q3 2018 and has the second largest debt burden in the Euro-zone after Greece. If the ECB raises interest rates substantially, then there are fears that Italy will struggle to pay back its debts and therefore possibly start another sovereign debt crisis. A stronger Euro would also compound the issue for Italy as the relatively weaker Euro is currently helping them to have a competitive edge on their exports. If Italy can’t find a way to return to growth within the EU framework, then there’s a chance that they might decide to go at it alone further down the line.

The anti-establishment movement is not exclusive to Italy and appears to be widespread across Europe. The recent serious street riots in France and the fact that an anti-immigration party is the fastest growing political force in German highlights this.
Politics is set to dominate sentiment in the Euro this year as well. Not only will Brexit be playing a major role but we also have the European Commission elections in May. The results of these elections will have direct and indirect consequences for the different countries within the region.

USD and World

The USD remained strong through 2018 as the Federal Reserve continued to normalise monetary policy from the emergency levels taken after the economic crisis. Although inflation levels hadn’t pushed too high, economic growth was deemed solid enough for the Fed to continue their programme of interest rate hikes.

A key question will be how much further will the Fed go with these hikes. It seems as though they’re getting closer to the end of their tightening cycle and traders will closely watch the economic performance figures and comments coming from the Fed for further clues. A slowing pace of hikes will likely put pressure on the Greenback.

President Trump has made a large impact on the markets since coming into power. However, he lost a lot of control towards the end of last year when the democrats took control of the House of Representatives after the mid-term elections. This is going to make it harder for Trump to push through some of his more controversial domestic policies. For example, there’s been a federal government shutdown in the US since the 22nd of December after the democrats failed to agree to funding of the Mexican border wall.

Currency rates are going to be heavily influenced by developments in the the US-China trade dispute. Will a full-on trade war develop between the two or will they flex and reach an accord? It’s likely they’ll reach some agreement but questions remain about how long it will take and how much damage will have already be done by that point.

China’s growth appears to be struggling at the moment which could have wider consequences for the global economy and could be the biggest story of 2019 if this continues. Market risk aversion has increased, causing stock markets to drop off and a flight to perceived safe-haven currencies. If the slowdown in China escalates then this could potentially lead to another global crisis.

So, as always, there’s plenty going on in the world of FX. Volatility is likely to remain high with major themes continuing into the new year. If you’ve not already done so, please make us aware of your upcoming requirements and budget levels. The key for the foreseeable future will be to remain agile but also protect levels according to your business goals.

Look forward to speaking soon and again wish you all the success for the year.