Good morning,
Scotland back on the risk radar
While the weekend’s political risk has been insubstantial sterling has been taken lower on two political stories released in this morning’s papers. The most likely and the one that is set to cause the lesser damage to sterling assets is the Telegraph report that Theresa May will announce on March 9th that, as well as triggering Article 50, the free movement of EU citizens into the UK will end on that day as well. This will be mirrored in the opening tone of the negotiations as and when they start; the EU will want their quid pro quo for such a measure.
The Times article that has caused more concerns however tells us that Theresa May is preparing for the Scottish government to call a second independence referendum to coincide with the triggering of Article 50. The expectation is that should Nicola Sturgeon request a referendum that the PM would only agree to it should it take place following the 2 year negotiation period.
Sterling is lower this morning but has recovered the majority of the losses as traders realise that we are not likely to get an answer on either of these stories anytime soon and that there is UK data throughout the week that could easily provide for sterling strength. It is not too early to start shorting the pound i.e. betting that it is going to get weaker but better entry points may present themselves in the near future.
More details on this will be available in our weekly sterling update published later today.
Trump set to address Congress
This is a big week for the US dollar with a Trump speech to Congress tomorrow night and speeches by both Fed Chair Janet Yellen and her Vice on Friday. Trump is evidently more of a wild card than the two members of the Fed but we are somewhat unsure as to what new he can say.
White House Spokesperson Spicer said on Thursday that Trump will focus on defence, taxes and jobs with hopes for a “renewal of spirit” – whatever that is. Once again, anything about tax reforms will be treated positively but reports that we won’t see anything on taxes until the repeal and replace of Obamacare has been voted on means that any detail now will be few and far between.
Treasury Secretary Mnuchin seemed to confirm this by saying that he had only just started looking at the Border Tax Proposal in the past week; there is a lot more ground to cover before a plan will be released. That being said, we are expecting some news on the Budget in mid-March which should include some costings and layaways.
Macron still polling well in 2nd round
It was a weekend of French political polling and good news for the Independent candidate Emmanuel Macron. One poll by Odoxa/Dentsu-Consulting showed Macron would beat Marie Le Pen in the run-off with 61% of the vote, versus 39% for her while another poll, this time by Figaro/LCI, showed Macron winning the runoff by 58% to 42%. The impact of his tie-up with Bayrou has not had an overwhelming effect on the euro and therefore we think that our two-way risk expectations for the currency still hold up; lower into the Dutch elections, higher following the French.
Our whitepaper on the Dutch elections and the risk to the euro is available here.
The Day Ahead
We have a fairly quiet data calendar to contend with today although a return to positivity for US durable goods orders is probable and should drive some additional USD strength this afternoon.
Have a great day