Back to Brussels again for another bash at Brexit

Sterling falls in the aftermath of last night's plan 'B' vote as attention turns to this evening's Fed meeting.

Previous Day's Market Highlights

Sterling fell 0.75% across the board yesterday evening in reaction to the parliamentary vote on Brexit plan ‘B’ proposals despite the vote going largely in the Prime Minister’s favour. As had been expected, Parliament made clear that it wanted to avoid a no-deal outcome by passing such an amendment however stopped short of passing Yvette Cooper’s amendment that would extend the Article 50 period by 9 months should a deal not have been reached by the end of February. The other amendment passed was that of Graham Brady which states that Parliament would accept the current deal, but without the controversial Irish border backstop. This has somewhat united the Tory party behind the deal, with the PM managing to convince both Eurosceptic and Europhile MPs to back her.
 
The Prime Minister is now set to head back to Brussels for renegotiations, however this is likely to involve a reopening of the Withdrawal Agreement, something that the EU are steadfastly against and have already ruled out. The fall in the pound was largely down to the failure of Parliament to rule out a no-deal outcome as well as the necessity to reopen the previously agreed treaty, meaning the two sides now seem further apart with very little negotiating time remaining.

Moving away from Brexit, other major currencies were well confined to their recent trading ranges due to a lack of tier 1 economic data and significant news flow. The most significant data of the day came in the afternoon session, with both US consumer confidence and house price growth figures missing forecasts to the downside. The former fell to its lowest level since July 2017 due to increased market volatility and the US government shutdown while the latter rose at the index’s slowest pace in 4 years. Despite the poor data, the dollar remained at unchanged levels with the single currency following a similar trend as no economic releases took place in the eurozone.
 
Away from FX, European equity markets added just under 1%, boosted by banking and mining stocks, while markets in the US recorded modest gains ahead of this evening’s Fed meeting. Finally, crude recorded solid gains with both Brent and WTI adding over 2.5% to reclaim all of yesterday’s losses on further concerns over supply from Venezuela after the imposition of US sanctions.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1437 1.1604 1.1035 4.90%
GBP/USD 1.3075 1.3281 1.2440 5.89%
EUR/USD 1.1440 1.1570 1.1280 2.51%
GBP/AUD 1.8175 1.8522 1.7613 4.91%
GBP/NZD 1.9095 1.9426 1.8603 4.24%
GBP/CAD 1.7336 1.7498 1.6756 4.24%

Today's Market Highlights

As the Brexit dust settles after last night’s votes in Parliament, focus will move across the pond to the culmination of the latest Federal Reserve meeting. With interest rates almost certain to remain on hold, focus will switch to the tone of the rate statement as well as the Fed’s assessment of the state of the US economy, especially the impacts of the recently resolved government shutdown. It is plausible that, due to the detrimental impact on economic growth from the shutdown, the Fed will pause their cycle of monetary policy tightening for longer than previously thought, with the market not yet pricing any interest rate changes this year. Confirmation of such an action would be seen as negative for the dollar. At the post-decision press conference, market participants will closely examine both the tone that Fed Chair Powell strikes as well as any possible comments surrounding the pace of the balance sheet run-off, effectively the unwinding of crisis-era QE.
 
In terms of economic data, the main highlight looks set to be ADP non-farm employment change figures for January, with investors likely to take a keen interest in the data ahead of Friday’s official labour market report. In Europe, focus is likely to rest with German inflation figures which have taken on greater significance in light of both the ECB’s cautious tone last week as well as the recent slump in domestic industrial production. Overnight, Australian CPI figures showed above forecast inflation with the headline measure increasing at 1.8% on a year-over-year basis, causing the Aussie dollar to gain around 0.5%.
 
Other data is less significant and unlikely to cause major market volatility including the monthly Swiss KOF economic barometer and personal lending and mortgage figures from the UK. Regarding the latter, sterling volatility is set to continue to centre around Brexit headlines rather than economic data.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:30am GBP Net Lending to Individuals (m/m) 4.3bn 4.4bn
1:00pm EUR German HICP Inflation (y/y) 1.7% 1.7%
1:30pm USD ADP Non-Farm Employment Change 175k 271k
7:00pm USD Federal Reserve Interest Rate Decision 2.25% - 2.5% 2.25% - 2.5%