Good morning,

GBP: Westminster returns

Today sees parliament return to Westminster and a return of focus on sterling that has not been seen since the week of the cancelled ‘meaningful vote’ and the failed confidence vote in Theresa May.

As a reminder, it is only 12 weeks until the UK leaves the European Union – with or without a deal. As we have noted in our 2019 currency outlook for GBP, a deal is naturally sterling positive since it eliminates a case of no-deal, but we think that there is the significant chance that this political game of chicken will force weak hands to sign a deal – something that could drive the pound lower in the short-term.

Friday’s GDP reports are unlikely to help the pound with a wider level of stagnation confirmed by last week’s PMI reports from the manufacturing, construction and services sectors. For the latter, the largest and most important part of the UK economy is slowing to a crawl according to the latest survey data.

While December was slightly better than November, the malaise felt into the end of the year will have far-reaching consequences on everything from the High Street to business services as we enter 2019. Slowing growth for a protracted period will eventually lead to cuts in capacity – i.e. jobs. In the meantime, we expect that business will continue to talk about margin compression as they attempt to pass on higher wage costs to consumers despite consumer reticence to spend likely to increase as we creep closer to the Brexit deadline of March 29th.

USD: Jobs and China boost sentiment

The dollar has weakened over the weekend as wider markets have taken positive cues from China’s decision to add more stimulus to its economy, a surprisingly strong jobs report in the US and comments from the Federal Reserve Chair that interest rate rises remain on track.

The US economy managed to add 312,000 jobs in December, well above the 175,000 that markets had expected. Higher wages and higher participation – i.e. more people looking for work – are strong signs. Growth of that magnitude is unsustainable, however; there have only been nine readings above 300,000 in the past six years and so, while a reading of this size is important, what is more important is whether other data points back up the exuberance.

Today’s look at the services sector at 3pm will be crucial to this following last week’s horrid manufacturing sector number

China and the US also restarted trade talks this morning and headlines from these conversations will set an expectation of both global growth and near-term risk for currencies.

EUR: Range bound for now

EURUSD is likely to remain range-bound this week while GBPEUR will remain subject to the vagaries of Brexit rumours. Today’s Eurozone retail sales announcement is expected to show a slowing of consumer spending on the Continent in December.

Have a great day.