Faith in sterling remains a coin flip in the run up to tomorrow’s vote

December 10, 2018

GBP

Sterling continues to trade in a tight range ahead of tomorrow’s big event. However, today’s ruling by the European Court of Justice could potentially see May withdraw article 50 unilaterally and delay the Brexit timeline, but this is highly unlikely due to it undermining her authority after she previously rejected this proposal. Should Brexit developments go ahead as planned, the main event of the Brexit saga will take place tomorrow evening as May attempts to get her draft Brexit deal through Parliament. It seems a virtual certainty at this point the deal gets voted down, but the margin by which this would happen is crucial for the faith of the deal, May and the Brexit. A loss by a small margin would keep the deal alive to go for a second round of voting after some fig-leaf changes, while a wide margin could spell the end of May’s career as 10 Downing Street dweller. Meanwhile, rumours on the street suggest further ministerial resignations may occur prior to the 19:00 GMT schedule as both Remainers and Brexiteers are unhappy with her deal going forward. Regardless, sterling will be in for a highly volatile few days this week.

EUR

The euro gained some ground against the dollar by the end of the week, closing on Friday ranking third among the G10 currency board. On the back of it, weak US labour data might have offset the non-surprising GDP reading for the Eurozone in the third quarter, coming out steady at a 0.2% growth rate on a quarterly basis in line with expectations. OPEC agreement on production cuts, on the other hand, may have displayed as good news for the much needed Eurozone inflation lift up. A continued revolt on the French streets, however, keeps souring sentiment arising from political turmoil while Q4 GDP growth in the Eurozone’s third-largest economy will likely not escape the bite from these protests. This week, the ECB is meant to announce its policy rate decision on Thursday, which is widely expected to stay unmoved, though the stubbornly soft core inflation and decelerating economic growth have fanned speculations a minor extension of the current Asset Purchasing Program may be on the cards.

USD

The dollar starts this morning firmly on the back foot after this weekend’s developments. The Chinese Foreign Minister, Le Yucheng, summoned the US Ambassador following the arrest of Huawei’s Chief Finance Officer. Yucheng stated that “China will take further action based on the US actions” calling the arrest “extremely egregious”. This could see the break of the 90-day truce between the two superpowers and see the year finish with a bout of dollar weakness. The labour market data that came out on Friday wasn’t constructive for positive dollar momentum either, as the November Non-Farm employment growth disappointed at 155K, while wage increases were soft as well at +0.2%. This week there is a whole string of data that may turn this momentum around again, with the Producer Price Index on Tuesday, the Consumer Price Index on Wednesday and Retail Sales on Friday.

CAD

There was only one unchallenged ruler of the G10 currency board on Friday, which of course was the loonie, after the unexpectedly large OPEC production cut initiated an oil rally that quickly spilt over into CAD strength. Crude oil prices gained 5% at some point on Friday after the OPEC countries agreed to cut the output of oil by 1.2 million barrels a day, while their partner OPEC+, Russia, also shared the intentions to decrease output by 200.000 barrels a day as of 2019. Domestic data then provided the icing on the already well-greased cake for loonie as the strongest level of job creation since 1976 was put on the boards, adding a further 94.000 jobs in November.

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