Good morning,
GBP: Back to Brussels
With 58 days to go until the UK is set to leave the European Union, Theresa May was told by the House of Commons to return to Brussels and get a better deal for the UK by reopening the withdrawal agreement and asking for ‘alternative arrangements’ to the backstop.
There are a few problems with this in so much as nobody knows what these alternative arrangements could be. As the Shadow Brexit Secretary Keir Starmer noted last night, “It (the phrase ‘alternative arrangements’) has been used twice in these negotiations in different ways: first to mean the future relationship itself and secondly to mean technology. It cannot mean the future relationship, because if we have a future relationship, we do not need a backstop; and if it means technology, it takes us back to the old idea of technology that is not there.”
Brussels, even before the vote had gone through, told Theresa May that the withdrawal agreement could not and would not be reopened in order to be renegotiated. Overnight it has become clear that should the talks be reopened then Spain wants its relationship with Gibraltar back on the table with other member states wanting to look again at fishing rights.
Sterling fell overnight as both the Cooper amendment – that would delay the end of Article 50 – was defeated and the Brady amendment forcing the government to look for a new version of the backstop was passed. The most important thing for sterling is that yesterday has eaten up time and that we are still without a deal, leaving us to believe that sterling isn’t going to be favoured ahead of the next meaningful vote.
The centre of gravity on GBPUSD is about 1.30 with GBPEUR about 1.13 and we expect prices to not get too far away from there in the short term.
We will do all of the parliamentary chicanery again in a fortnight’s time with the next meaningful vote taking place on February 13th/14th. In the meantime, amendments delaying Article 50 can be resubmitted and may have further support should we simply be close to the cliff-edge but with only six weeks left on the clock.
Those of you who attended our webinar yesterday will know that we think this could all come down to the last few days. The next two months will be the highest stakes game of chicken since the Cuban Missile Crisis.
USD: Fed speeches and trade talks
The Federal Reserve meets later today and is not expected to shift its interest rate policy. Despite the lack of news on rates, tonight’s press conference will see the assembled journalist team try to pick apart the Federal Reserve’s exact thinking behind any pause in its cycle of interest rate hikes.
Yesterday saw consumer confidence in the US fall to its lowest level since September 2017, although this may be more a result of political pressures taking place in the US more than any economic news.
Trade talks begin today between China and the United States with markets positioned as much for good news as no new bad news in the form of increased tariffs on Chinese exports into the US economy. The Trump Twitter feed is likely to remain the most important channel for news on these discussion.
AUD: Inflation surprise
The Aussie dollar stiffened this morning following a higher than expected inflation reading overnight that showed that interest rate hike expectations are not dead yet.Iron ore prices – one of Australia’s main exports – also supported the currency after an announcement from a large Brazilian competitor that they would slow production. AUD can continue its run higher if additional members of the Reserve Bank of Australia echo calls for the next move in interest rate hikes to be higher.
Have a great day.