FX market outlook

FX market outlook

Posted on Friday, March 29 2019 at 10:30 am GMT+0000

Pound plunges as May makes final push for her deal; dollar holds firm as trade talks eyed

  • Sterling is in freefall again after Prime Minister May decides to put her deal to a third vote, but without the political deceleration on a future relationship
  • Dollar holds near highs despite lower GDP revision as Treasury yields recover
  • Stocks bounce back as bond rally eases and on optimism of US-China trade deal

MPs to vote again on Withdrawal Agreement minus the political declaration

British prime minister, Theresa May, made a last-ditch attempt to get her Brexit deal through Parliament. But with the DUP party still opposed to her deal and the clock ticking to secure a delay to Brexit until May 22, May has decided to push for a third vote by separating the Withdrawal Agreement from the political declaration on the future relationship.

May is hoping that by splitting the vote between the Withdrawal Agreement and the political declaration, there will be enough rebel Labour MPs backing the divorce deal to make up for DUP votes. Labour are mostly opposed to the political declaration because it does not include a customs union. However, voting for the Withdrawal Agreement without having any idea what the future relationship will look like might a bigger risk for Labour MPs and so May’s gamble might not pay off.

The pound fell on May’s latest move as it was seen as only increasing the uncertainty. There is a risk that even if the deal was to miraculously pass, it would open the prospect of a harder Brexit if May steps down as prime minister and her replacement takes a different approach on the future relationship. Should the deal be rejected again, it would put the focus firmly on the next round of indicative votes next week, with the customs union and a second referendum options gaining momentum.

Sterling plummeted by more than 1% yesterday and was last trading 0.2% lower at $1.3015.

Dollar continues to shine even as economy slows

The US dollar outshined its rivals on Friday with the dollar index holding firm near 2½-week highs and advancing to a one-week high against the yen. The greenback was supported by a rebound in Treasury yields with the 10-year moving away from 15-month highs to climb back above 2.4%.

Dollar strength comes despite yesterday’s downward revision to US growth in the fourth quarter. Annualized GDP growth for Q4 was revised down from 2.6% to 2.2% and growth is expected to slow further in Q1. However, with growth slowing faster in other parts of the world and more central banks turning dovish, US yield still look relatively attractive.

The euro and the New Zealand dollar are two currencies that came under pressure this week from their respective central banks sounding more dovish. The euro fell to a 3-week low of $1.1212 yesterday on reports that the European Central Bank could introduce a tiered deposit rate to alleviate the impact of negative rates on banks, suggesting that negative rates are here to stay.

But the kiwi, along with the Australian dollar, managed to bounce back somewhat as risk sentiment was lifted on hopes that the trade talks between the US and China are nearing a successful conclusion.

Stocks up on trade hopes

US officials arrived in Beijing yesterday to resume trade discussion, with US Treasury Secretary Steven Mnuchin saying that talks were “constructive”.  The talks will continue next week amid speculation that the negotiations are in the final stages after China reportedly made substantial proposals on key issues such as forced technology transfers.

The latest developments helped detract attention away from recession fears, lifting global stock markets. Chinese equities rallied by more than 3% today and European indices also opened sharply higher, shrugging off Brexit and slowdown worries.

Commodities didn’t benefit from the risk-on higher as gold was under pressure from recovering US yields, while oil prices took a hit from another tweet by US President Donald Trump asking OPEC to increase supply. Gold was last trading at $1291 an ounce and WTI oil was recouping some of yesterday’s losses to rise to $59.77 a barrel.

PCE inflation coming up

Looking at the rest of the day, the Brexit vote in the UK Parliament will the big anticipation. The vote will likely take place after 1900 GMT and the result expected to be close. Revised UK GDP estimates for Q4, due at 0930 GMT will also be watched.

In the US trading session, the main focus will be on US personal income and spending figures, as well as the core PCE price index, which the Fed closely monitors, at 1230 GMT.