Developments in politics key

GBP – Brexit withdrawal vote

The focus this week is the Brexit withdrawal vote in the House of Commons, planned for tomorrow evening. Members of Parliament are expected to vote on any amendments before the key vote on the EU Withdrawal Agreement. The government lost two key votes last week, including an amendment which means that if it loses tomorrows vote, it would have to outline next steps within three sitting days. 

The fallback position of a ‘no deal’ Brexit is less likely given the amendments last week.  Sterling has strengthened over the course of the week. Two more days of debate remain and the outcome still appears highly uncertain.  The Speaker will select which amendments will be voted on and this could affect the final outcome. A number of ‘plan B’ possibilities may open up if the vote is lost and a close vote might mean the EU offer further reassurances. 

If the bill is defeated there is a high chance of a vote of no confidence being put forward by Jeremy Corbyn.  Some MPs would prefer a second referendum. Either option would require an extension of Article 50, though the government continues to say that Brexit will not be delayed. 

With data taking a back seat to Brexit, GDP growth for the final quarter of last year is on track to grow at 0.3%.  This is stronger than previous surveys suggest, but half that of the third quarter.  This week,  inflation and retail sales are both expected to show declines. Bank of England Governor Carney also testifies on the Financial Stability Report.

GBPEUR – 1.1195

GBPUSD – 1.2846

EUR – Weaker industrial output

Last week, the largest four economies in the Eurozone registered large falls in November industrial output.  This suggests that fourth-quarter GDP for the region is also likely to be lower than expected. We expect Eurozone November industrial production to fall sharply by around 1.8%, reflecting the fall in national figures. 

Later in the week, the preliminary estimate for December inflation is expected to show a fall in the headline rate to 1.6%, while core inflation is expected to remain muted at 1.0%. The minutes of ECB’s December meeting, showed last week that officials are concerned about the economic outlook.  With this in mind, ECB President Mario Draghi speaks at the European Parliament tomorrow. 

EURUSD – 1.1475

EURGBP – 0.8933

USD – Shutdown continues

The combination of hopeful signs from trade talks and dovish comments from Federal Reserve officials supported a rally in risk sentiment last week. The minutes of the December Fed meeting noted that policymakers can afford to be patient about further tightening.  There has been more importance given to Fed speakers recently with a number due to speak on the economic and policy outlook this week.  This follows inflation for last month falling to 1.9% from 2.2%, led by a sharp fall in energy prices.

The US government shutdown is now the longest in history with little sign that it will end soon. It has led to some data not being produced, and a continuation is likely to have a more significant impact on the economy. This week we are due to see many data releases including retail sales, housing starts & permits, industrial production and University of Michigan consumer sentiment.  Not all of the government data is likely to be released.

GBPUSD – 1.2846

EURUSD – 1.1475

Do get in touch if you would like to discuss further.

*Interbank rates correct as at 7 am on the date of publishing