Quelle Surprise by Powell and Co
March 21, 2019
Another day another debacle, in the UK Parliament that is. Sterling continued to be flung around in yesterday’s trading session by political headlines after Theresa May applied to the EU for a 3-month extension in Article 50. At which point, the reality of Brexit hit the market. Currently, the UK remains on track to leave the EU without a deal and complacency to price this in was seemingly shaken out midway through yesterday’s session. The backlash soon followed after the EU stated it would be “very hard” to extend A50 past the European Parliamentary elections in May without the extension being of a longer time frame. By seeking a 3-month extension, May seeks to appease a potential Brexiteer revolt within her party while also threatening the possibility of more Brexit should her deal not be ratified by lawmakers. Today, the Prime Minister will arrive in Brussels for Britain’s “final” European Council summit. After pleading her case to the 27 leaders this afternoon, May will be ushered out as the European powers decide on the UK’s fate. Speculation over the tenor of May’s premiership remains in abundance. Meanwhile, a Brexit bounded Bank of England will release their monetary policy decision this afternoon. With uncertainty lingering over the UK economy, still, Carney will continue to stress the importance of patience at the central bank while pointing towards strong inflation and wage growth figures as a cause for optimism.
The euro was one of the main recipients from last night’s weakened dollar with EURUSD rallying over half a percentage point in the day. The move was more pronounced against a slumping pound as GBPEUR fell over a percentage point yesterday, a move that seemingly has momentum this morning. After staving off a string of bad data, the euro sighed a breath of relief and has shown clout in rallying from a 21-month low against USD at the beginning of the month. Risks still remain prominent in the Eurozone economy, however, and with the ECB’s economic bulletin published today and German manufacturing data released tomorrow, the euro may finish the week with a bang.
Another dovish turn by the Federal Reserve last night sent the dollar plummeting across the board with the broad DXY index falling 0.66%. The revised forward guidance measure showed 11 out of 17 Fed officials are not planning on raising rates at all in 2019, down from the market’s assumption of one 25 basis point hike this year. Meanwhile, further dovish surprises came in the form of balance sheet runoff. Previously, the Fed had been incrementally tightening monetary policy by reducing liquidity in financial assets, but they plan to stop doing so in September this year – a whole quarter before the general assumption. This would leave the balance sheet at a little more than $3.5trm at the end of Q3. Additional tweaks came in the form of growth and inflation forecasts, of which both were revised down to 2.1% and 1.8% respectively for 2019. The move came as a relief to countries servicing dollar-denominated debt and sparked relief rallies in the currency market. The most notable beneficiaries included the euro, SEK, MXN and ZAR. The US yield curve continues to fall as expectations of higher US interest rates in the 2-10 year window falls, stimulating the dollar to open this morning on the back foot.
A big fall in US inventories yesterday saw crude oil hit new 2019 highs yet again. Inventories fell by an estimated 9.25m barrels last week while demand picked up. With no Venezuelan crude imported into the US, the news looks as if OPEC+ supply cuts are finally starting to show traction. Despite this, and broad USD weakness, the loonie closed only marginally higher. Friday could be the day of reckoning with January’s Retail Sales released and February’s CPI figure too.