Talk about movin’ – both May and Corbyn forced to sterling positive concessions
February 26, 2019
Sterling traded relatively flat yesterday as Theresa May spent the day in Egypt for the European Union league of Arab states, but showed a flurry of strength just before 18:00 GMT when Labour leader Jeremy Corbyn officially backed a second referendum. This increased the prospects of the Brexit process being reversed as remaining in the EU would officially be one of the voting options under the proposed Labour amendment. This morning, sterling hit a fresh 4-week high after news broke that PM May will brief cabinet on an extension in Article 50 before addressing Parliament to outline the “progress” that has been made at mid-day. This could well see a vote in the House of Commons, should the next meaningful vote fail, to decide on an extension in Article 50 or a hard-Brexit scenario. Arguably, this may be redundant should the Cooper amendment be passed on Wednesday, but this morning’s news looks like a last-ditch effort by May to retain power over the Brexit process. The recent bowing down to political pressure, with a meaningful vote pencilled in and an Article 50 extension likely, evidences the likely swing in Brexit towards a softer exit. With the new Independent Group eroding the oppositions party, and Labour’s official stance gradually moving towards that of remain, May could well find a majority in Parliament for a soft exit after all – conditional that the Irish backstop is still cleared up. This is the narrative sterling is trading off of for now.
The euro was off to a slow start of the week yesterday, with neither data nor major monetary policy developments coming out. The biggest happening was the result of local elections in Sardinia, Italy, which showed that the left wing government party Five Star Movement only received a meagre 11% of the votes, compared to 43% in as little as a year ago. As most of the voters now backed a right-wing coalition of multiple parties among which the FSM’s coalition partner The League, FSM looks vulnerable, which even led to some party members questioning the position of its leader and Deputy Prime Minister Luigi di Maio. This shows the first cracks in the FSM-League coalition are appearing, which can be a euro positive, as this would put a bomb under the controversial fiscal spending plans that send nervous tremours through Italian bond markets in 2018. Today’s German and French Consumer Confidence indices were the most important data release, showing that optimism among consumers is slowly starting to build momentum in these countries.
The greenback was stuck in the middle of the G10 currency board yesterday, in a day of continued trade optimism in US-China negotiations. President Donald Trump suggested he could meet with President Xi Jinping for a signing summit in his Mar-a-Lago resort in Florida, should a trade agreement be reached. Despite that he also added that a trade deal “might not happen at all”, markets shifted into their risk on gear, removing a chunk of former USD strength. All eyes are placed today on the US Senate House at 14:45 GMT where Federal Reserve chair Jerome Powell will be testifying on the state of the economy. A central question will be how the economic slowdown has prompted a U-turn in the Fed monetary policy agenda towards a dovish stance. Special attention could be put on any further hint of a pause on the balance sheet runoff this year.
We live in a strange world as Donald Trump, who does not control any of the oil production, can talk down the oil prices in a tweet, while the oil cartel OPEC seems unable to talk it up. As a result the loonie bottomed the G10 board for the second day in a row. The president made his discontent clear about OPEC supply cuts leading to a recovery in oil prices after the market reached a 15-month low last December. On the recent cut path, some foresee prices ranging on the $70-$75 per barrel level. However, prices are currently holding losses below $56 per barrel after the largest fall in four weeks, fueled by Donald Trump´s call on Opec putting production cuts to “relax”.