USD remains near three month lows after longest government shutdown in history
January 14, 2019
Friday saw sterling rally on rumours of a delay in the date of the UK’s departure from the EU, and this morning May travels to the Brexit heartlands this morning in an attempt to urge Eurosceptic MP’s to back her withdrawal deal in tomorrow’s meaningful vote. The British Prime Minister is then set to address the House of Commons this afternoon at around 15:30 GMT. Given that she is already pencilled in to speak at the end of the 5-day debate on Tuesday, prior to the meaningful vote taking place, many political pundits believe that today’s speech will be her deliverance of much-anticipated clarification from Brussels. Regardless, the pound is poised for another volatile week as Brexit headlines take to the fore and outshine this week’s data releases.
The euro closed last Friday on the back foot against the dollar after a USD rally in the European afternoon session. Weak industrial production for Spain and Italy, which fell in November by a 2,6% on annual basis, joined the poor performance of Germany and France released in the previous days. Concerns about the European recovery were also raised in a speech by Jozef Makuch, Slovakia´s Central Bank Governor, which continue to weigh on the optimism towards the prospects of the single currency. This week promises interesting events, with the meaningful Brexit vote taking place tomorrow, the Italian Finance Minister Giovanni Tria speaking on Friday and European Central Bank officials taking the microphone throughout the week.
The US dollar bounced back on Friday from three-month lows seen on the DXY index, after a week where several downside risks became more prominent. The end of last week was characterized by more dovish remarks of Federal Open Market Committee members, among which its chair, Jerome Powell. Today the US enters the longest government shutdown in history and S&P global ratings already calculated another two weeks of the government shutdown will cost the US economy approximately $5.7 billion, more or less the cost of building the border wall with Mexico. The shutdown in 2013 that lasted 16 days shaved off 0.4% of US GDP growth in the fourth quarter, which provides somewhat of a benchmark of what the current 21-days-lasting shutdown does. This week, the US dollar may be set for further weakness with the US beige book released tomorrow, which may show signs of a further slowdown in the US economy, and the G20 summit at the back end of the week. US-China trade talks continue to tick along and will likely be boosted by China’s record trade surplus with the US in December that was announced this morning.
The recent period of loonie strength looks to have fizzled out as the US dollar continues to post minor gains against the oil-sensitive currency. With WTI crude prices falling back down to the $50 a barrel mark, where they are expected to reside in the near-term until the glut in supply is absorbed by OPEC+ production cuts, the loonie may fail to pounce on a weakening US dollar.