FX market outlook

FX market outlook

Posted on Wednesday, January 16 2019 at 9:47 am GMT+0000

May suffers Brexit defeat, can she survive no-confidence vote?

  • Sterling recovers despite May’s Brexit defeat; no-confidence vote due today
  • Euro inches down as ECB’s Draghi adopts an increasingly cautious bias
  • Risk appetite stays firm; NAHB housing index today may be crucial

Pound rebounds even as May suffers major defeat; no-confidence vote called

British lawmakers overwhelmingly voted against PM May’s Brexit deal yesterday, with 432 rejecting the accord and 202 voting in favor, a much wider margin of defeat than rumored. The loss was so devastating that it led the opposition Labour party to immediately table a motion of no-confidence in the government. That vote will be held today at 1900 GMT, and should it succeed, the UK will head to early elections. Otherwise, the government will have until Monday to present an alternative plan to Parliament.

As for the pound, even though it was under selling pressure prior to the vote, it staged a spectacular rally after the result was known, rising by roughly 2 cents against the dollar to close the session practically unchanged. Some pundits suggest it was a “buy the fact” reaction, perhaps driven by optimism that May would survive the no-confidence vote today. That may be true, but it could also be that markets are coming to terms with the fact the only majority that exists in Parliament is against a no-deal exit, which in essence suggests the biggest “tail risk” for the UK currency is dissipating.

Today, sterling will take its cue from how the no-confidence vote plays out. Considering that the DUP has already said it will support the government, the question becomes whether May can rally all her Tory troops behind her in order to command a majority in the Commons. A potential survival for the PM – which seems like the most likely scenario – could help the pound advance somewhat, whereas the uncertainty of early elections may hurt the currency, initially.

UK CPI data for December are also due out, but barring a major surprise, these will likely be overshadowed by political developments, given what’s at stake.

Cautious Draghi drags euro down, sets stage for dovish tilt next week

The euro underperformed all its major peers on Tuesday, outside of the Swiss franc. The move was fueled by dovish-sounding comments from ECB President Draghi, who speaking before the European Parliament said that recent economic developments have been “weaker than expected”.

Indeed, the continued deteriorating in the bloc’s data suggests that the ECB could adopt a more dovish tone when it meets next week. If so, that would suggest any near-term euro gains may remain relatively limited. Yet, considering the dovish market pricing around the Fed as well, any major downside in euro/dollar seems unlikely too – implying the pair could remain range-bound for a while.

S&P 500 closes above key level as risk appetite remains buoyant

Market participants remained in a risk-on mood on Tuesday, with US stock markets recording meaningful gains and safe-havens like the Japanese yen inching lower. Sentiment was supported by hopes for another dose of Chinese fiscal stimulus, while a surge in Netflix (+6.52%) after it announced plans to raise its fees also pushed Wall Street higher, particularly the tech-heavy Nasdaq Composite (+1.71%). Some dovish remarks from regional Fed President George, who is typically one of the most hawkish members of the FOMC, likely helped as well.

Meanwhile, the benchmark S&P 500 (+1.07%) closed above the key 2600 handle; the same level whose downside violation in mid-December brought about a prolonged losing streak. The index is now not far below its 50-day simple moving average; if it manages to close above it in the coming sessions, that could turn the medium-term technical outlook to a more neutral one.

Focus today will be on the NAHB housing market index; remember that most of the concerns about the US economy slowing down are predicated on a weakening housing sector and hence, this print could prove crucial for sentiment.