Sterling strengthened above $1.30 and €1.15 as the markets’ judge that a ‘no deal’ Brexit has fallen. Rising UK wage growth, which has reached a ten year high of 3.4% also added further support.
The focus this week is on the House of Commons vote on Theresa May’s ‘plan B’ Brexit motion tomorrow. A number of amendments have been put forward. The Cooper-Boles amendment could, if passed, make the government extend Article 50 if there is no approved Brexit deal by 26 February. Other amendments provide scope for MPs to vote on different Brexit options, while the Murrison amendment adds a time limit on the Irish backstop. The selection by Speaker Bercow of which amendments will be voted on will be very important.
UK business and consumer surveys will provide an idea of the impact political uncertainty has had on confidence. We expect the reports to have stabilised or improved since December. We have hope to see an improvement in the GfK consumer confidence reading and a slight uptick in the manufacturing PMI to 54.4.
GBPEUR – 1.1552
GBPUSD – 1.3179
In contrast to sterling, the euro was weighed down by a more dovish assessment of growth risks by the ECB. Both the Eurozone PMI and German IFO surveys suggest a further weakening of the economy in 2019. The ECB left its guidance unchanged for now and will re-evaluate in March, but said the risks to growth “have moved to the downside”.
We expect the first estimate of Eurozone fourth quarter GDP to show only modest growth of 0.2%. This would be in line with the third quarter but is half of the ECB’s forecast growth. The ECB has commented that the near-term growth is weaker than previously anticipated. French and Italian GDP numbers this week are both expected to show slowing growth.
Eurozone CPI inflation for January is likely to show another drop due to lower energy prices. Against this backdrop of slower growth and softer inflation, ECB President Draghi will speak at the European Parliament.
EURUSD – 1.1408
EURGBP – 0.8657
In the US, the shutdown eventually came to a close yesterday after the 35-day partial closure. Hundreds of government facilities will now come back online, as hundreds of thousands of furloughed employees awaited back pay the administration promised would arrive by the end of the week.
US-China trade talks continue ahead of the 1st March deadline, with Chinese Vice-Premier Liu scheduled to meet key US negotiators in Washington. Reports suggest that progress is being made, but without signs yet of an imminent breakthrough.
The US FOMC is expected to keep interest rates unchanged at 2.5%, but the key focus will be its signals about future policy. They will come from the press statement and Chairman Powell’s press conference. We expect a more ‘dovish’ message, with the Committee signalling that they can afford to be ‘patient’ before moving policy again. Markets continue to forecast two rate increases in 2019.
The first estimate of fourth quarter GDP may not be released as a result of the government shutdown. The January labour market report is expected to show a robust rise of 180k and a fall in the unemployment rate to 3.8%. Furloughed workers due to the government shutdown are not expected to affect payrolls.
GBPUSD – 1.3179
EURUSD – 1.1408
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*Interbank rates correct as at 7 am on the date of publishing
