(Another) Crunch Week for Brexit

Sterling struggles as uncertainties linger ahead of another key week for Brexit while upbeat trade headlines see risk sentiment remain healthy

Previous Day's Market Highlights

The ongoing Brexit deadlock continued to drag sterling lower on Friday; with Brussels not wanting to agree an extension until the UK's intentions become clear, and Westminster political parties waiting for the EU to decide on the length of any potential Brexit delay before confirming their plans. The government are, however, continuing with their plan of having another attempt at passing the Withdrawal Agreement Bill, before holding an early general election in December. This plan will likely have been spurred on by weekend opinion polling which puts the Conservatives 16 points ahead of Labour, the Tories biggest lead since the 2017 snap election. Nonetheless, political parties remain split on the issue of an election:

  • The Conservatives are in favour of an election on 12th December, with Parliament dissolving on 6th November after another attempt at trying to pass the Withdrawal Agreement Bill
  • Labour are refusing to back an election until "no deal is off the table"; whether a 3-month Article 50 extension satisfies this statement is unclear
  • The Liberal Democrats and SNP are prepared to back an election on 9th December, and will bring forward an one-line bill to this effect if the government's motion fails

The latter stance is perhaps the most interesting, with reports over the weekend indicating that the government may be prepared to back the Lib Dem/SNP plan should their own motion fail later today. However, this plan would require the Withdrawal Agreement Bill to be dropped completely, somewhat complicating matters.

Speaking of complicating matters, French President Macron still appears to be holding out against a further extension of Article 50; stating that the UK needs to clarify the situation first and that any delay must be "justified and proportionate". While Friday's meeting of EU27 ambassadors resulted in unanimous agreement that a delay was needed, the length of such a delay could not be agreed. Ambassadors plan to meet again at the beginning of this week, though if no delay has been agreed by Tuesday evening, plans are afoot for an emergency EU Council Summit to be held on Wednesday - just one day before the legal Brexit deadline of 31st October. 

Combined, the aforementioned uncertainties saw sterling lose ground for a second straight day as the week drew to a close. Against the dollar, sterling slid by 0.25%, recording back-to-back daily losses for the first time since the beginning of the month. The pound also struggled against the euro, losing 0.15% over the course of the day.

Meanwhile, US-China trade relations continued to show signs of improvement, helping risk sentiment to remain healthy. Friday saw a host of upbeat comments from the US side, with Trade Representative Lighthizer indicating that he was 'close' to finalising 'some sections of the trade deal'. At the same time, President Trump's Trade Adviser Peter Navarro indicated that Friday's US-China discussions were 'excellent'. These optimistic comments saw the dollar gain ground, adding 0.2% against a basket of peers, and also helped the Aussie dollar to remain well-supported. The greenback largely shrugged off a modest downward revision to October's consumer sentiment figures, which remain at their highest level since July.

The stronger dollar dented the attraction of the euro, which resulted in the common currency losing 0.25% to trade at a 1-week low. In contrast, Friday's best performer was the Canadian dollar, which benefitted from a continued firming of oil prices.

Away from FX, equity markets on both sides of the Atlantic ended the week on the front foot. In Europe, the pan-continental Stoxx 600 closed 0.15% higher; while the US benchmark S&P 500 added 0.4%, closing just shy of a record high. Finally, oil prices settled around 0.5% higher on Friday, with both Brent and WTI recording their best weekly gain in over a month.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1565 1.1661 1.1086 4.93%
GBP/USD 1.2825 1.3012 1.2195 6.28%
EUR/USD 1.1085 1.1179 1.0879 2.68%
GBP/AUD 1.8820 1.9094 1.8076 5.33%
GBP/NZD 2.0210 2.0559 1.9311 6.07%
GBP/CAD 1.6765 1.7095 1.6191 5.29%

Today's Market Highlights

It’s once again shaping up to be a busy trading week, which could potentially conclude with England winning the Rugby World Cup for the first time in 16 years.
In the UK, political developments will continue to dominate, and will remain the main impetus behind sterling volatility. This afternoon, the government are set to make their third attempt at holding an early general election, with MPs set to vote on whether a poll should take place on 12th December. This afternoon’s motion is, however, likely to fail, with opposition MPs remaining reluctant to back an early poll until a Brexit delay has been confirmed. Should this afternoon’s motion fail to obtain the two-thirds majority (434 MPs) required by the Fixed-term Parliaments Act, the government are likely to explore alternative routes to a poll (such as the one-line bill detailed above), should a 3-month Article 50 extension be granted.
Speaking of extensions, EU27 ambassadors will continue to closely monitor developments in Westminster, with further meetings set to take place during the early part of the week as discussions over a Brexit extension continue. Latest reports indicate that ambassadors will discuss a 'flextension', with the Brexit deadline pushed back until 31st January, but the UK having the opportunity to leave early if the Withdrawal Agreement were to be ratified before the deadline. Should the EU27 nations be unable to reach unanimous agreement on an extension by Tuesday evening, an emergency EU Council Summit will be called for Wednesday for leaders to thrash out the details of a delay in person. Also, not to be forgotten, Thursday remain the legal default day for the UK to leave the EU, assuming no extension is granted.
Away from Brexit, the week ahead is a busy one for monetary policy decisions. Of most importance to the global economy, the Federal Reserve are set to, on Wednesday, announce their third 25bps interest rate cut in as many meetings. Such a cut would bring the target range for the Federal Funds Rate to 1.50% - 1.75%, and would represent the FOMC providing further ‘insurance’ as the US economy continues to face growing downside risks. Meanwhile, the Bank of Canada (BoC, Weds) and Bank of Japan (BoJ, Thurs) are both set to keep policy on hold. The BoC are, however, likely to strike a more cautious tone, with the Canadian economy vulnerable to the global economic slowdown; while the BoJ are set to preserve their incredibly limited monetary policy ammunition and avoid tinkering with any policy instruments this time around.
Turning to this week’s data calendar, a number of notable releases are due. Primary focus will likely be on this week’s initial estimates of third quarter GDP from the eurozone and the US. In Europe, growth is expected to have slowed further in the third quarter to just 0.1% QoQ, largely as a result of the ongoing slowdown in the manufacturing industry. Meanwhile, in the US, growth is expected to fall to its slowest pace since Q3 2016, with GDP expected at just 1.6% on an annualised QoQ basis. Other focuses this week include Friday’s US labour market report, expected to show a further moderation in hiring, in addition to Wednesday’s Australia CPI figures and Friday’s global manufacturing PMI data.

Today's Economic Calendar

Time Currency Release Consensus Previous
12.30pm USD Chicago Fed National Activity Index (Sep) -0.37 0.10
15.00pm EUR ECB President Draghi Speech at Farewell Event
Tentative (PM) GBP Parliament to Vote on Early General Election Motion