Good morning,

GBP: Get ready to do this all again

Groucho Marx summarised in the past 36hrs in Westminster very well when he said “I have nothing but confidence in you. And very little of that.” Theresa May’s government has the confidence of the House of Commons but her flagship Brexit plans remain in tatters following Tuesday’s defeat.

In a sense, nothing has actually changed and so sterling is basically unchanged on the week despite all the headlines and votes. Parliament will largely be quiet for the rest of this week – the House is not sitting on Friday – with Monday the next hurdle for the Brexit plans to vault with the government set to announce its ‘Plan B’ by then.

My expectations are that ‘Plan B’ will look a lot like ‘Plan A’ in a different coat. Indicative votes in the Commons on other stances such as the customs union, membership of the single market, a second referendum and revocation/postponement of Article¬†50 will also likely be mooted.

It is almost a certainty that last night’s confidence vote is re-run at some point before March 29th as well, especially if the compromise talks between Westminster leaders break down. There is little consensus in Westminster but avoidance of a no-deal is one and, should the government pivot towards leaving the EU without an agreement, we would expect pro-EU Conservative MPs to vote against the government, forcing an election.

The political fun is not over by a long shot but sterling may be in for a couple of days off from being the most watched currency. Leaks of any concessions between the Westminster parties or the UK and EU are bound to be in the Sunday papers and could make the Asian session into Monday morning a volatile one.

Today’s data calendar is also quiet apart from a speech from EU Chief Negotiator Michel Barnier at 08.30 this morning. Retail sales from December are due tomorrow morning.

USD: Beige Book points to a rebound

The Federal Reserve’s Beige Book – a summary of economic conditions around the country – was published last night with some interesting points that may be enough to change the direction of travel of the US dollar in the coming months.

Energy prices came lower towards the end of the last year and with it came sentiment in the energy sector. Oil prices are now over 20% up on the lows, so investment and expenditure by the energy sector could easily be more supportive than they have been, stimulating growth a little more. Similarly, several areas of the country reported that retail sales traffic was stronger in December than they were in 2017.

The main sentence to pay attention to is “Outlooks generally remained positive, but many districts reported contacts had become less optimistic in response to increased financial market volatility, rising short-term interest rates, falling energy prices, and elevated trade and political uncertainty.”

In our opinion all but one of those factors have improved in the past few weeks and so should US economic sentiment, possibly leading to some renewed dollar strength.

AUD: Dragged lower by jobs fears and the Kiwi

The Aussie dollar didn’t manage to hold onto prices above 0.72 against the US dollar yesterday and has come lower as investors position themselves for next week’s unemployment report. The Aussie dollar also followed a weak NZD as expectations slipped ahead of the latest inflation report from New Zealand on January 23rd.

Have a great day.