Good morning,

GBP: Compromise hopes drive further gains

The closer we get to Tuesday’s run of Brexit votes in the House of Commons, the faster the rumour mill turns. This morning’s Sun newspaper is reporting that Theresa May’s DUP partners in the government’s confidence and supply arrangement will now back the PM’s Brexit plan if changes in the Northern Irish backstop are made. The DUP and some Brexiteers want a time-limited backstop while some are holding out for a total dismissal of the concept entirely.

The backstop is in effect and insurance policy to maintain an open border between Northern Ireland and the Republic in the event that the UK and EU do not come to an agreement on the future relationship by the end of the transition period.

While the DUP and Conservatives may be coming closer together, we have to remember that this is one facet of the withdrawal agreement that the EU has said that compromise is not available upon. Theresa May will likely return to Brussels late next week once the dust settles and her deal is defeated once again.

Sterling is always happy to run higher on compromise and has made some strong gains so far this month and is set for its best week since the beginning of 2018. We would be in remiss to note that a lot of this sterling optimism has come on the belief that Tuesday’s amendment votes force the government into a delay to the end of Article 50. While reports from friends in political circles suggest that the amendment has the votes to pass, we cannot be sure until Tuesday whether the amendment is selected by Speaker John Bercow and whether the order of any other amendments act as a spoiler.

If that amendment is no longer viable or offering the pause that markets are pricing in, then sterling will have no business being at these levels and Tuesday could be a painful day.

EUR: ECB concerns push euro lower

The euro came in for a bit of a thumping yesterday with the European Central Bank sounding a little more unsure on the European economy than some had thought. The killer line from ECB President was that ‘risks to the Bank’s outlook have moved to the downside’ since the last meeting.

Other members of the European Central Bank have fallen in behind their boss to sound similar calls of uncertainty this morning. Bank of France members, Coeure and Villeroy, told a crowd in Davos this morning that the European Central Bank may have to adjust its rate guidance at some point this year, that it was too early to discuss whether interest rates should be raised this year, and that the ECB is likely to cut its growth forecast in March.

These are exactly the kind of circumstances that could see GBPEUR maintain its recent run higher with some in markets looking for 1.1750 soon.

USD: Jobs numbers keep USD in favour

As expected the dollar pushed onward yesterday following a strong jobless claims number. That the US economy is able to have north of 160 million people employed, with only 200,000 new people a week claiming unemployment insurance, and wages this low suggests that pay has a long way to climb, bolstering the US dollar.

The US government shutdown continues to delay publication of some economic indicators but strength for the dollar will continue as long as the tone of the trade talks between the US and China remains antagonistic. Commerce Secretary Wilbur Ross yesterday told reporters that the US and China were ‘miles apart’ on a trade agreement.

Have a great day.