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May defeated in commons – Trump walks out of shutdown talks

By Jake Trask

Theresa May suffered yet another setback yesterday with regards to her Brexit strategy as MPs voted in favour of limiting the amount of time allowed for another plan to be voted on to three days, rather than the three weeks normally allowed under parliamentary rules. It is widely expected that Mays withdrawal agreement will be defeated on the 15th Jan and the development means there is less time for May to get further concessions from the EU if this does materialise. The decision by Speaker of the House, John Bercow to allow the vote on limiting time allowed was widely derided by May supporters who accused him of setting a dangerous precedent by allowing back benchers such influence over government policy. It should also be noted that any plan B, C or D they may come up with will not have the approval of Brussels. GBP/USD continues to trade in its weekly range between 1.27 and 1.28, it currently sits around 1.2765.

The minutes from the latest Federal Reserve meeting were released yesterday evening echoing recent words from Fed Chairman Jay Powell that we are likely see patience from the Fed with regards to future rate hikes. It was revealed there was some opposition to the December hike from some members of the Federal Open Market Committee who suggested a lack of inflationary pressures didn’t warrant the move. With global stock markets suffering throughout the 2018 and the world’s two largest economies, The US and China, starting to slow down on the back of Trumps trade offensive its hardly surprising the Fed has chosen to signal a pause in its tightening cycle. There are some in the markets who think that could be it for the time being and the next move could be lower if the trade impasse isn’t resolved anytime soon. The dollar was sold off on the news with EUR/USD now getting a foothold above the 1.15 handle and USD/JPY back under 108. Powell is due to take part in a Q and A session at the Economic Club of Washington DC this evening so we may get some further clarity on how patient the Fed intends on being.

As is almost always the case, dollar weakness has seen the euro rally over the past 24 hours and it seems like EUR/USD may have finally broken out of its 1.1250 – 1.15 range seen since mid-October. With many analysts predicting an end to the dollar run you would be forgiven for thinking a gradual push up to 1.20 could be on the cards for the shared currency however a slowing in Eurozone inflation and some concerning data emanating from Germany may put the brakes on the euros advance. Indeed, after hitting a high of 1.1570 overnight we are now back down to 1.1530. The next move higher or lower may come from this lunchtimes publication of the European Central Banks minutes from its last policy meeting, the print is due at 12:30pm. GBP/EUR is down to 1.1065.

Yesterday’s risk-on rally has come to an end with global equity markets lower this morning. Markets were hoping for a breakthrough with regards to the China/US trade talks and the US government shutdown however no concrete news has come from Beijing and there are reports that Trump walked out of a meeting with Democrats aimed at bringing an end to the temporary closure of many government departments. Trump is trying to get approval for $5.7bn to be spent on a wall along the Mexican border, a key campaign pledge however the Democrats, who control the House of Representatives aren’t playing ball. The shutdown looks likely to rumble of for the time being and risk assets including the Aussie have been hit as a result. AUD/USD which had dropped below 70 cents for the first time since 2016 last week was heading towards .72 however we are now back down .7170. Tonight’s Retail Sales figures from Australia may provide the impetus for another move to .72 however the commodity currencies moves are generally dictated by global risk sentiment rather than domestic numbers at present. GBP/AUD trades at 1.7770.

The Bank of Canada kept interest rates on hold at 1.75% yesterday with bank chief, Stephen Poloz leaving the door open for moves higher later in the year. Brent crude oil has broken above $60pb over the past 24 hours providing additional support for the Canadian dollar which has performed better than the other commodity currencies in the year to date. USD/CAD briefly dipped under 1.32 yesterday on the back of Poloz’s comments re: future rate hikes however ongoing concerns over Trump and China meant the move was short lived. We currently sit at 1.3240 with no top tier data due from Canada for the rest of the week. GBP/CAD is at 1.6890.

The Kiwi has mirrored the Aussies move lower over the past day with a halt to its advance provided by the risk off environment enveloping markets overnight. There is no data from New Zealand for the rest of the week so external factors will continue to be the main driver of the local dollar. GBP/NZD is at 1.8810.