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Sterling up as May's Brexit plan set to be voted down

By Jake Trask

It’s the start of another crucial week for Theresa May with her Brexit withdrawal agreement due to be voted on in the House of Commons tomorrow evening. Defeat for the plan is all but assured however it is the margin of defeat and what happens thereafter which will be the main mover of sterling. Should May succumb to a narrow(ish) defeat of 60-80 votes then that may encourage the EU to issue some sort of further comment re: the Irish border to try and win over hardcore Tory Brexiteers to agree to May’s plan. If, as expected the margin of defeat is closer to 200 votes then the EU may decide to keep quiet and see how events play out. Once defeated, the government will have to put forward another plan within three parliamentary days, which means another vote could take place on Monday 21st. It seems increasingly likely Labour leader, Jeremy Corbyn is going to issue a vote of no confidence in the government should it lose the vote which could open the door to a softer Brexit. There is also the possibility we could see MPs table a motion that the UK is not allowed to leave the EU without a deal. With limited time for any of these permutations to play out it seems more and more likely we will get some sort of extension to Article 50. The chances of another referendum and the UK not leaving altogether are also increasing, especially seeing as EU courts recently gave the UK the unilateral right to cancel Brexit if it wished. This is likely the reason GBP/USD is up above the 1.28 handle this morning as any hint of Brexit not happening or at least being delayed is pound positive. As a footnote we also have CPI and Retail Sales numbers from the UK this week, expect these to be completely overlooked by the fx markets.

The US government shutdown continues in the States, entering its 24th day today with no end in sight to the dispute. US President Donald Trump is refusing to sign off on a budget unless funding is approved for his planned wall along the Mexican border. With Democrats refusing to agree to the controversial spending plans it seems likely the impasse will rumble on for some time to come. It’s a quiet week data-wise from the States with tomorrows PPI number the only print of note due. Outside the States there is further evidence the ongoing trade war between the US and China is impacting on the world’s second largest economy. Exports from China showed a fall of 4.4% for December compared to a year earlier its worst showing in two years which has prompted a sell-off in global stock markets. One of the key barometers for global risk, USD/JPY continues to trade around the 108 handle around six yen lower than its late November peak. EUR/USD is back under 1.15 at 1.1470.

The euro has lost some ground since Friday as risk aversion sees the shared currency pare some of its recent gains against the dollar. It seemed like the euro had finally got a handle above 1.15 after breaking out of its recent ranges however the move has been short lived as concerns linger over the US/China trade dispute and grow over the health of some of the EZs largest economies. Germany has been hit hard by falling demand from China and to a lesser extent the UK of its exports. There is a chance the world’s fourth largest economy could slip into recession when Q4 GDP figures are released early next month. Italy has also been hit by a slowdown in output which was accentuated by its recent budget negotiations. Italian GDP tracked lower throughout 2018 and may print negative when Q4s prelim reading is announced on 1st Feb. GBP/EUR sits at 1.1180 (EUR/GBP .8945).

The proxy for Chinese economic sentiment, the Aussie dollar is back under .72 against the US dollar as the previously mentioned poor export numbers from China weigh on global risk sentiment. Japanese markets are closed today for Coming-of-Age Day however all other major Asian and European bourses are trading lower as the week gets going. This week’s one release of note from Down Under is the Westpac Consumer Sentiment survey which is due tomorrow night. GBP/AUD sits at 1.7835.

The loonies month to date rally against the dollar looks to have come to an end as more poor Chinese data halts Brent Crudes recent fightback putting it back under $60 a barrel. USD/CAD which was heading for 1.31 last week was close to breaking above 1.33 earlier today however some pull back has occurred as European markets opened for the day. CPI data is due from Canada on Friday with December expected to show -0.3% fall in prices following on from Novembers -0.4% slip. GBP/CAD sits at 1.7025.

NZD/USD briefly dipped below the .68 handle during the Asian session however some support has been restored to its value over the past couple of hours. It currently trades at .6810 with GBP/NZD at 1.8840 ahead of a very quiet week domestically from NZ.