Good morning,

GBP: Crumbling foundations

Sterling had a horrible day yesterday, falling by the most in a session since the government lost the ‘meaningful vote’ on its Brexit plan midway through January. The catalyst was yesterday’s services PMI release that showed sentiment in the UK’s most important sector had stagnated in January with new business and employment measures falling into contractionary territory. In other words, the UK’s most valuable industry is slowing to the point of dragging the entire UK economy towards not growing at all.

The shift in sterling sentiment was fairly marked yesterday. While the politics are a circus, at least the data was showing relative stability and resilience. That is no longer the case and another foundation that had held sterling up in the past month or so has crumbled.

Needless to say, sterling risks remain in the form of tomorrow’s Bank of England meeting and Inflation Report as well as Theresa May’s visit to Brussels to attempt to renegotiate the backstop with the EU. There is no deal which delivers the Brexit that the British people voted for that does not contain this insurance policy. The EU will not negotiate without it. But don’t take my words for it, Theresa May said that.

News reports that the European Research Group of hard-line Brexiteers are set to vote down any plan that Theresa May brings back from Brussels shows just how much of a fool’s errand the whole thing has become and will likely sit on sterling throughout the day.

AUD: Not so fast

The strength that the AUD felt yesterday has evaporated overnight after the Reserve Bank of Australia’s latest policy statement focused more on risks to the Bank’s outlook than most had expected.

“Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced,” Governor Lowe said in his speech overnight.

While noting that higher wages could eventually mean higher interest rates, the Governor also said “On the other hand, given the uncertainties, it is possible that the economy is softer than we expect, and that income and consumption growth disappoint,” In the event of a sustained increase “in the unemployment rate and a lack of further progress towards the inflation objective, lower interest rates might be appropriate at some point. We have the flexibility to do this if needed.”

This is classic Central Banker for ‘we have no clue until the data shows us one way or the other”. The AUD will follow the same path with one eye on China’s success in weathering its recent trade and credit related issues.

USD: Trump adds little to trade arguments

President Trump’s State of Union address did little to move markets overnight. The main risk would have been Trump invoking powers granted to him as Commander in Chief to unilaterally declare that funding for the Mexican border wall would be granted. That did not happen, neither did an escalation of the rhetoric around trade with China.

Dollar has strengthened throughout the overnight session, aided by the fact that most of Asia remains on holiday for the Lunar New Year today. Trade date from November is due this afternoon and will likely show greater signs of frontloading to avoid increased tariffs that, at that point, could have been imposed on January 1st.

Have a great day.