May seeks Plan B after the catastrophic loss last week
January 21, 2019
After the historic defeat of her Withdrawal Bill last week Theresa May is once again set to pull a new rabbit out of her hat that can shake the Brexit process out of its deadlock as she is expected to announce her ‘Plan B’ from 14:30 GMT. May will seek to strike further concessions with the EU to clear up the contentious Irish backstop mechanism. Eurosceptic Conservatives, along with the DUP party, have reservations about the UK’s inability to leave the Irish backstop unilaterally, meaning the UK could remain in the EU for the foreseeable future via a loophole in the agreement. Recent promises by the British Prime Minister to step down prior to the next general election and to hold a vote of MPs before the UK enters the backstop mechanism have proved insufficient to nudge her prior deal across the line, reinforcing the need to clear questions over the Irish backstop before any deal is ratified. With much ambiguity over the next steps in the process, May’s speech today will increase clarity for the market and outline the government’s stance on further negotiations after the proposed bilateral deal between the UK and Ireland was shot down over the weekend. Average Weekly Earnings would normally be the release to watch out for this week at Tuesday, but as the Brexit process is approaching its climax, everything else is pushed out of the limelight.
The euro had a volatile beginning of the day during the Asian early session after it was already among the group of relatively poor performers among the G10 currencies against the US dollar last week. The Bank of Italy´s downward revision of growth prospects could have weighed on investors’ sentiment, with 0.6 and 0.9% Gross Domestic Product growth rates expected for 2019 and 2020, revised from 1% and 1.1% projections previously. This decline could potentially mean that Italy will not be able to meet its widely debated deficit target, which was set at 2.04% of GDP after the European Union refused to approve an initial plan of 2.4%. While this topic will likely return to the agenda in the following days, all eyes this week are focused on the European Central Bank policy announcement on Thursday. With lower than expected growth and inflation likely to feature prominently in the ECB´s speech, we do not expect any shifts in the policy rate and forward guidance. Nevertheless, we note that a dovish wildcard for this meeting could be a new set of long term refinancing operations signalled in the press conference following the rate announcement.
After strengthening throughout much of last week, the DXY dollar composite index has started to weaken this morning after China has posted its slowest annual growth rate since 1990. The government shutdown continues to drag on, forcing members of the Trump Administration to withdraw from the World Economic Forum in Davos that begins on Tuesday after Donald Trump withdraws his attendance. Today the US enjoys a bank holiday to remember Martin Luther King Jr and thus no data is released for the dollar. However, Trump may become active on Twitter again after announcing a summit with North Korea in February in Vietnam over the weekend.
The higher than expected December inflation combined with WTI crude oil prices that found their way up were enough to lift the loonie to the top of the G10 currency board on Friday. The Consumer Price Index contracted by 0.1%, however, this was notably stronger than the 0.4% decline for the month penned in earlier by economists. Oil prices meanwhile appeared to benefit from the supply glut that seems to have been soaked up to some extent, as shown by crude oil inventories that are declining again. This puts a floor under the oil price, which has CAD as one of its beneficiaries. This week starts at a solid pace with Manufacturing Sales on Tuesday and Retail Sales on Wednesday, only to fizzle out later during the week as no data is released after.