Good morning,

GBP: Splits and cuts

Sterling was a lot quieter yesterday than on Tuesday and has been able to hold up above the 1.30 level against the USD. The news that three Conservative MPs had resigned the whip to join The Independent Group knocked sterling lower initially before recovering.

Losses of Labour MPs do not change the parliamentary mathematics; Conservative MP resignations however hurt the government’s majority and another three or four defections would make a confidence motion in the Conservative government a very tight affair. Therefore, the chances of an election have increased somewhat in the past few days.

Overnight, the ratings agency Fitch has downgraded its outlook on the UK’s credit rating. The agency said that a no deal outcome or a new relationship with the European Union that “undermines” the British economy could result in a downgrade. S&P were the last ratings agency to downgrade the UK’s credit rating, doing so a few days after the EU referendum vote in 2016.

Prime Minister May met European Commission President Jean-Claude Juncker in what was called a “constructive” meeting yesterday. Brexit Secretary Steve Barclay and Attorney General Geoffrey Cox are in Brussels today and will hope to propose changes to the Northern Irish backstop that may clear parliament next week.

AUD: China halts imports of Aussie coal

The Aussie dollar has cracked lower overnight following a volatile session with a headline that China has banned the import of Australian coal doing the damage. A few hours before that announcement, a stronger than expected jobs report calmed fears that economic momentum was slowing in the country and that the Reserve Bank of Australia will need to cut interest rates at some point this year. Westpac, one of the ‘Big Four’ of Australian banking, called for two cuts this year after the jobs report.

The news that China is blocking the import of Australian coal is another factor entirely and took another per cent out of the AUD. The Chinese statement uses the term “indefinitely” and therefore may limit the chance that recent falls in demand were merely about running down excesses.

USD: Close to trade decision

The minutes of the last Federal Reserve meeting read broadly as we expected, leaving a range of policy outcomes still very much in play. Dollar was not in a reactive mood.

Similarly, the dollar has remained quiet despite more positive news on trade overnight. While nothing concrete has been announced yet, it is being reported that memorandums of understanding that would form the basis of a trade deal are being agreed between the US and China on areas such as intellectual property, agriculture and non-tariff barriers.

China’s chief negotiator Liu He and President Trump are expected to meet on Friday, a day that could see an extension to the current truce on additional tariffs on Chinese exports into the United States be extended beyond March 1st.

The most important piece of data released today is from the US with capital goods orders due at 13.30GMT. A rebound from a poor Q4 could be enough to signal that the global economy and global trade are set to recover as we move through 2019.

Have a great day.