May retreats, but sterling doesn’t
February 27, 2019
Sterling was the standout currency in yesterday’s session after it rallied 1.18% against the dollar and hit 5-month highs in the day. The fresh highs didn’t stop there, after GBPEUR reached its highest level since May 2017. A culmination of the falling probability of a no-deal Brexit and the increased likelihood of a softer Brexit, given Labour’s new stance for a second referendum and rumours May would seek an extension in Article 50, sent sterling on its way yesterday morning. At mid-day, the Prime Minister addressed Parliament to outline her new stance, which looked a lot like Yvette Cooper’s amendment to legally stop a no-deal scenario. The ploy by May was a last ditch effort to maintain control over the Brexit process and included 3 new proposals. A meaningful vote would occur prior to March 12th and if the fudged withdrawal bill fails to navigate through parliament yet again, two votes will be given to lawmakers. The first would be on whether to pursue a no-deal Brexit and if that fails to pass, the second would be to seek a short extension for Article 50. Sterling continued to hold its gains throughout the speech by the PM but pared its gains after May reiterated that an extension means no-deal will remain on the table. This shook the market somewhat and sterling retreated from its highs against both the euro and dollar. But the 4 p.m. London fixing, which is a historical time period where large investors used to rebalance their accounts with major banks, saw a flurry of sterling buying which cracked fresh highs yet again. These proved fragile, however, and some profit taking saw sterling close a third of a percentage point from the high of the day against both USD and EUR. Today, after Prime Ministerial questions at 12 p.m. the House of Commons vote on a whopping 12 backbench amendments, which include the original Cooper amendment that sought an extension in Article 50 and a fresh amendment by Spelman and Dromey which could give Parliament control a week after the meaningful vote deadline. This is what May tried to avoid, and with plenty of cross-party backing, could untangle much of May’s work yesterday.
The euro was pulled up by UK political developments yesterday that make a hard goodbye with the British Isles from the European Union less likely, although it still lost almost a percent against sterling. The positive French and German consumer sentiment were the most interesting domestic data yesterday, pointing to the possibility of consumers to accelerate growth with their extra spending in 2019. Today sees European Central Bank’s M3 Money Supply at 9:00 GMT, followed by a speech by the ECB’s Jens Weidmann.
Yesterday, the greenback resided at the floor of the G10 currency board, mainly pushed back by the advance of the GBP and a display of patience by Federal Reserve Chair Jerome Powell. Although he provided few hints for future monetary policy steps, the Fed chair declared that there is no rush for making further movements as long as the “crosscurrents and conflicting signals” in the US economy remain present. Even when markets might have already discounted most of the current dovish stance of the Federal Reserve, today´s Powell´s second speech in Congress may fuel some further dollar weakness. However, dollar bears will be also looking at Donald Trump´s meeting with North-Korean president Kim Jong-Un on the denuclearisation program of the Asian country. Trump has already talked down any expectations on this front; yet, this geopolitical matter bears some potential for triggering global risk-off moves. When he returns from Hanoi, he will be facing some discontent at home. The House has voted against his border emergency call and Senate could be close to doing the same. On the other hand, Michael Cohen, Trump´s former lawyer, is ready to tell Congress that Mr Trump lied about his links with Russian business during the 2016 presidential race.
The loonie began to claw back some of Monday’s losses against the US dollar as the greenback generally weakened across the board. Meanwhile, WTI crude prices begin to rise after falling over US$2 a barrel on Monday. The current Social-Liberal government blasted out a report about the decline in poverty in the country, which is an indicator that recent employment growth benefits all ranks of Canadians, which in theory should boost consumption as the propensity to consume for lower incomes is high. Such reports are an indicator that households may be in the position to boost growth, although the high level of Canadian household debt indicates previous obligations may be met first before other expenditures will be increased.