Good morning,

GBP: Crunch time

It may have taken nearly two years but we are finally getting to the crunch point of Brexit negotiations. Of course, these negotiations are not between the EU and the UK but actually between the UK and itself.

Reports over the weekend suggest that, while another vote on the government’s Brexit plan could come tomorrow night, it will only be brought to a vote if Theresa May has enough votes to pass her deal. If not, she’ll head to Brussels on Thursday and seek a long extension from the EU in a bid to untangle the Gordian knot that Brexit has become.

The second meaningful vote was defeated by a margin of 149 and while that is less than the 230 who voted against her on the first iteration, it represents not nearly enough progress. If this vote, given a no-deal has been rejected politically, is cast as the only Brexit or Britain runs the risk of no Brexit at all, then that may be enough to swing more votes behind her but it seems a stretch to see her win on Tuesday. That is unless she trades her position as Prime Minister in a bid to land her deal.

A long extension – over six months – would be regarded as a positive by sterling markets although we believe that those six months would likely see an election and therefore cannot be certain that any sterling strength can be maintained.

USD: Still the place to be

The highlight of the economic calendar this week is Wednesday’s Federal Reserve meeting. There is a very small chance that interest rates are hiked this week in the US but almost not enough to warrant focus. Instead, we will be looking at the Fed’s comments on the domestic economy – which has remained strong in 2019 so far – and whether the ‘dot plot’ chart of Fed member interest rate expectations have shifted markedly in the past quarter. We would be very surprised if there was much more than one 25bps increase in rates ‘expected’ in the coming 18 months.

Any economic forecasts that show newfound weakness in the US are unlikely to materially damage the US dollar; there are many reasons to remain optimistic of the US economy and the dollar’s position as the global currency of choice given risks elsewhere.

AUD: RBA minutes due overnight

Overnight tonight the Reserve Bank of Australia will release the minutes from its meeting at the beginning of the month at which it once again chose to keep interest rates at 1.5%. Economic data in Australia has been strong enough to maintain faith in the overall narrative that, while the second half of 2018 was weaker than policymakers would have wanted, the growth fundamentals for this year look decent enough to maintain the belief that the next move in interest rates will be higher, not lower.

Have a great day.