Confidence in the govt ...But where next?

Sterling drifts along waiting for fresh Brexit news as the government narrowly survives a confidence vote.

Previous Day's Market Highlights

Sterling drifted on Tuesday, trading broadly flat awaiting the result of the motion of no confidence in the House of Commons. Some notable developments throughout the day included rumours of the EU exploring concessions surround the Irish border backstop as well as continued whispers of a possible extension to the article 50 period. While both were quickly denied by officials, the pound is likely to remain relatively well-supported while the prospects of a softer Brexit remain on the table.

As expected, the government narrowly won yesterday evening's vote of no confidence by a margin of 10 MPs, meaning that the Prime Minister remains in power. This result was largely expected hence the pound shrugged off the vote and traded flat in reaction to the news. It is important to note, however, that without the votes of the 10 DUP MPs, the government would have lost by one vote, underlining the fragility of the current political balance.

Away from Brexit, the latest set of UK CPI inflation figures showed a two-tenths of a percent decrease in headline inflation, with prices increasing at 2.1% on a year-over-year basis. The drop in headline CPI was down to the recent fall in energy prices, however inflationary pressures are seemingly starting to build in the UK economy, with core CPI increasing at an above forecast 1.9% on a year-on-year basis. Elsewhere, US retail sales fell victim to a delay owing to the ongoing government shutdown in the US. Other major currencies remained relatively rangebound, with the euro gaining just 0.1% against the greenback and the yen losing 0.2%.

In other markets, European bourses were in the green at the close, adding around 0.4%, though the UK’s FTSE 100 lost 0.5% ahead of the no confidence vote. In the US, markets rallied, adding around 0.3%, led by financial stocks after strong Q4 results from Goldman Sachs and Bank of America.  Finally, crude prices slid by around 0.7% as data showed US inventories continued to grow and crude production remained at record levels.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1291 1.1293 1.1018 2.44%
GBP/USD 1.2858 1.2931 1.2440 3.80%
EUR/USD 1.1387 1.1570 1.1280 2.51%
GBP/AUD 1.7962 1.8190 1.7556 3.49%
GBP/NZD 1.9081 1.9100 1.8389 3.72%
GBP/CAD 1.7087 1.7392 1.6756 3.66%

Today's Market Highlights

After the government survived yesterday’s no confidence vote in parliament, the near-term direction of the pound looks set to depend on the next steps that are taken in the Brexit negotiations. The Prime Minister has invited the leaders of opposition parties for talks in an attempt to gain a consesus for the best way forward. While it is expected that PM May will head back to Brussels in the coming days, Monday’s speech in the House of Commons announcing ‘plan B’ will provide markets with some clarity on the likely timeline for the coming weeks.

Away from Brexit, the highlight from the economic calendar is set to be the release of final eurozone CPI inflation figures for December are set to show inflation slowing to 1.6% on a year-over-year basis. The slowdown in inflation is largely due to a fall in energy prices, hence the core inflation measure is likely to be more closely examined by investors, with inflation of 1% on a year-over-year basis expected. With market participants currently unsure over the timing of the ECB rate hike this year, the inflation figures will be key to any policy changes from the central bank.

Other economic data is of a lower tier, with only US weekly jobless claims of note. Such weekly data rarely crosses the radar of many traders however could be more significant this week due to the ongoing lack of US economic data owing to the government shutdown. Market expectations are for a figure around 220k. Investors may also keep one eye on the Philadelphia Fed Manufacturing Survey due to the continued fears surrounding global growth and the recent slowdown in the US manufacturing sector.

The calendar is also lacking in central bank speakers, with only Fed voter Quarles slated to speak on financial stability. Any audience questions relating to monetary policy and a possible pause to the cycle of raising interest rates could cause some volatility in the dollar.

Today's Economic Calendar

Time Currency Release Consensus Previous
10:00am EUR Final CPI (y/y) 1.6% 1.6%
10:00am EUR Final Core CPI (y/y) 1.0% 1.0%
1:30pm USD Initial Jobless Claims 220k 216k
1:30pm USD Philadelphia Fed Manufacturing Index 10.0 9.1