The second ‘meaningful’ vote on a Brexit deal is scheduled for tomorrow. There will potentially be further votes, including to extend Article 50, if the deal is rejected. There appears to be no sign of a breakthrough in negotiations to provide reassurances on the Irish backstop. The Brexit showdown vote is likely to be closer than the first vote in January (rejected by a record margin of 230) and the pound will rally if the deal is accepted. If, however, the deal is rejected again, Mrs May has said that there would be a vote on Wednesday on whether to accept a ‘no deal’ Brexit. If not, another vote on Thursday will be held on whether Article 50 should be extended. Previous suggestions are that a majority of MPs do not favour a ‘no deal’ Brexit so the expectation is that the vote to delay Brexit would prevail.
A key unknown in the process is what amendments to the government’s motions will be put forward, which will be selected by the Speaker and their level of support in the House of Commons. That could be important for the vote on the Thursday if we come to that. Any vote to extend Article 50 would also have to be agreed by the EU, which would most likely be at the EU summit next week.
The ONS will release January GDP figures tomorrow, expected to show a rise of 0.2%, following the 0.4% drop at the end of 2018. The rise is expected to be driven by stronger services growth. Industrial production, construction output and trade data will also be released at the same time. The Bank of England foresees growth of 0.2% for the first quarter, which would match the fourth quarter of last year. Meanwhile, the Chancellor’s Spring Statement on Wednesday is expected to be a relatively low key affair, particularly after tomorrows vote. He is expected to downgrade 2019 GDP growth leading to higher borrowing in the coming years. That is anticipated to be partly offset by an ‘underlying improvement’ in public finances.
GBPEUR – 1.1555
GBPUSD – 1.2985
The European Central Bank (ECB) last week revised down economic forecasts and signalled that there would be no interest rate rise this year. As a contrast to downbeat ECB headlines, Eurozone hard data started the year on a positive footing with industrial output forecast to rise strongly. As a result German 10-year bund yields fell to 0.05%, the lowest level since 2016. The Euro also fell below 1.12 against the US dollar, before recovering somewhat.
It’s a relatively quiet data week for the Eurozone this week. Brexit developments will remain a key focus. The past week saw the ECB revise down its economic growth and inflation forecasts. It signalled no interest rate rise until 2020 and announced new long-term loans to banks, although on less favourable terms than the existing programme. For all the downbeat headlines, there are signs that Eurozone economic activity started the year on a more positive footing. Retail sales jumped by 1.3% in January, while we expect a strong 1.5% increase for Eurozone industrial production. We have already had strong January Industrial Production numbers from France, Italy and Spain, with German data due today.
EURUSD – 1.1238
EURGBP – 0.8654
US CPI inflation and retail sales are the key data releases form the US for this week. Annual headline CPI has fallen significantly due to lower energy prices in recent months. February CPI, however, is expected to post the first month-on-month rise (of 0.2%) since October, which would keep the annual figure at 1.6%. Annual core CPI is expected to remain steady at 2.2%. Retail sales for January will be important to assess whether weakness at the end of 2018 extended into the New Year. Among other key releases are durable goods orders, industrial production and the University of Michigan consumer sentiment survey.
The current consensus forecast for first quarter GDP growth is 2.0%, down from the 2.6% figure at the end of last year. Combined with contained inflationary pressures, this will reaffirm the Feds patience regarding further policy tightening. There are concerns over the impact of trade activities on global growth as China announced GDP growth target of 6.0-6.5% for 2019, compared with 6.6% in 2018. US February non-farm payrolls rose by only 20k, well below the expected 200k, though wage growth increased to 3.4%. This Paints a mixed picture of a less robust employment market that remains tight given the low level of unemployment.
GBPUSD – 1.2985
EURUSD – 1.1238
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*Interbank rates correct as at 7 am on the date of publishing