US government reopens, USD closes lower
January 28, 2019
Sterling enjoyed a positive week last week amidst strong UK economic data, and also benefitted from rumours that a deal has been reached between for the DUP to provide support for Prime Minister Theresa May’s Brexit plans. Majorities are beginning to show in Parliament, helping sterling find a leg higher, but the mixed message from the House of Commons has made it difficult yet again for the market to determine the likeliest outcome of this week’s vote. Overnight, The Sun reported that a dozen pro-Remain ministers agreed to give the Prime Minister a two-week deadline to win a majority for her deal or else they will quit and block a no-deal scenario ensuing. Regardless, this week remains a jam-packed week for Brexit, with the Parliamentary vote on amendments to the PM’s ‘plan B’ on Tuesday. A second meaningful vote is not guaranteed to occur swiftly afterwards, but with the threat of further ministerial resignations, May’s arm could be twisted for a swifter outcome.
The single currency needed the entire week to warm up, but when it did on Friday the result was a ferocious rally against USD that made EURUSD eventually close higher on the week. The move was caused mostly by an improvement on markets in risk appetite, as JPY was one of the big losers on Friday while emerging market currencies and commodities gained. Domestic Eurozone data was less buoyant, with the German Ifo Business climate sinking to 99.1, the lowest level in 8 years. This signals growing geopolitical uncertainty continues to weigh ever more heavily on the German economy, which bodes ill for Europe’s largest economy after an already quite pale last half of 2018. This week kicks off with European Central Bank President Mario Draghi testifying before the European Commission at 14:00 GMT, with the first Q4 Gross Domestic Product readings on Thursday, and the January Flash Consumer Price Inflation on Friday. All in all, a busy week appears to be ahead for the euro.
The USD is hoping for a better week after the broad dollar DXY index fell over half a percentage point last week against its G10 peers. The Federal Reserve’s rate announcement is the main data release for the dollar this week after a record-long US government shutdown ends. On Friday evening, the US President Donald Trump announced that the 35-day partial shutdown would cease for the next three weeks while the White House and Senate negotiators look at measures to fund the border wall. The real effects to the economy are yet to be realised, however, and with a global economy set to begin slowing down the signs for the US dollar remain negative. On Wednesday, the Federal Reserve Governor Jerome Powell faces his first of 8 press conferences this year where the future of monetary policy and the central bank’s outlook on growth are the likeliest line of questioning.
The loonie was one of the main benefactors of the improved risk sentiment as CAD claimed inroads of more than a percent against USD. Meanwhile, WTI crude oil prices have recovered almost 25% since their troughs just before Christmas, which very likely played a role in USDCAD moving to its lowest point more than two weeks. This week sees the November GDP release on Thursday as the most important event on the economic calendar.