Good morning,

USD: Walls of worry

A poor retail sales announcement and fears that yesterday’s trade truce extension may not come to pass have weakened the US dollar overnight. Retail sales fell in December with both in-store and internet retailing declining into Christmas. We have said it a thousand times before but we all have to realise that November is now more important to December for retailers given the heft of Black Friday sales. December’s numbers were also affected by concerns over the US shutdown and the slowing of stimulus from 2018’s tax cuts.

In a bid to avoid another government shutdown, President Donald Trump is set to sign a funding agreement later on today that also provides some funds for the border wall between Mexico and the United States. The problem however is that President Trump also plans on using executive authority powers to bypass Congress and spend an additional $8bn on the wall. Legal challenges are already being talked about and, amid a fractious trade environment and the Mueller investigation waiting in the wings, the political risk to the US dollar continues to rise and rise.

GBP: Guess what? Nothing has changed.

If there is one currency that is the embodiment of political risk at the moment it is the pound. Although the government lost last night’s votes on Brexit, there is once again little change to the overall landscape of Brexit. Yesterday’s votes have¬†no legal effect¬†on the UK leaving the EU on 29th March. Indeed, the only effect they have had is political in further weakening the Prime Minister’s hand in the negotiations and the clock has obviously ticked down further.

Now our focus will shift to February 27th and the possibility of another meaningful vote on the wider withdrawal agreement. Between now and then Theresa May and her Brexit negotiators will continue talks with the European Union over alternative arrangements to the Northern Irish backstop. A breakthrough is not our central scenario and we expect Theresa May’s deal as it currently stands to be defeated once again the next time it goes to parliament.

UK retail sales are due today and could easily follow the example set by the US figures yesterday.

EUR: Spain unlikely to hurt the euro for now

The euro has been relatively unaffected by the news that Spain will likely go back to the polls soon for another general election following the defeat of the current government’s budget in Parliament this week. Initial polls suggest that the result will leave the parliament fragmented although influences from more populist parties are diminishing.

We do not expect the euro to be affected much by the back and forth in Madrid but politics have a funny way of hurting expectations.

Have a great day.