Escaping the Impasse

Sterling holds steady as the UK & EU hold "constructive" talks, with a deal inching closer while the dollar gains after the FOMC minutes.

Previous Day's Market Highlights

Sterling traded flat against the dollar and the euro on Wednesday, paring earlier gains, with ever-intensifying political headwinds and fruitless, though conciliatory, talks between the UK and the EU weighing on the pound. Firstly, political headwinds intensified as 3 Conservative Party MPs resigned from their party to join the new ‘Independent Group’ of MPs – a group united behind a 2nd referendum rather than political ideology. While it was always unlikely that these Europhile MPs would vote in favour of the Prime Minister’s deal, the move provides further evidence of the fragility of the government’s position with further resignations remaining a possibility.
Despite the domestic political uncertainty, optimism that a ‘no-deal’ exit from the EU would be avoided spurred most of the pound’s early gains. Although the UK-EU meeting proved fruitless, the two sides seemed to be edging closer to a deal with both PM May and President Juncker commenting that the meeting was “constructive”. The two leaders also emphasised a desire for their teams to work towards a solution for the Irish backstop and affirmed their desire to meet again before the end of the month. Markets will still be cautious however, with Bloomberg reporting that the EU will require Parliament to approve a renegotiated deal before the EU27 leaders sign it off. 
Away from the UK, the dollar gained around 0.25% after the release of minutes from the latest Federal Reserve policy meeting. The minutes struck a less dovish tone than expected, with Fed officials emphasising that the labour market remains strong and that inflation is nearing their target level. FOMC members did express caution however, with many members being unsure of what rate action would be needed this year. Elsewhere, the euro traded relatively flat amid a lack of major economic data, while the Canadian dollar added 0.4% as crude prices rallied. Overnight, the Aussie dollar lost almost 1%, despite a strong jobs report, as China moved to ban Australian coal imports at its Dalian port.

In other markets, European equities gained, with the pan-European Stoxx 600 adding 0.7% as most sectors closed in positive territory. Across the pond, US markets gained 0.2%. Finally, oil prices rallied once again, despite forecasts for record US shale output. Global benchmark Brent added 0.7%, while US benchmark WTI gained over 1.5%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1505 1.1604 1.1312 2.52%
GBP/USD 1.3043 1.3218 1.2773 3.37%
EUR/USD 1.1337 1.1514 1.1233 2.44%
GBP/AUD 1.8329 1.8522 1.7844 3.66%
GBP/NZD 1.9123 1.9426 1.8701 3.73%
GBP/CAD 1.7203 1.7498 1.6960 3.07%

Today's Market Highlights

Today sees a busy economic calendar, with spotlight likely to fall on two major releases from the eurozone. Firstly, manufacturing and services PMI figures will be closely watched for any signs of a continued softening of economic activity, especially after recent ECB comments indicating that the economic slowdown is broader and stronger than anticipated. Expectations are for the services PMI figure to firm slightly, to 51.4, however the manufacturing figure is expected to continue its fall to a level of 50.3. Such a level is not only just above the key boundary between expansion and contraction, but would also be the lowest figure in around 4 years. Secondly, market participants are likely to closely examine minutes from the ECB’s latest monetary policy meeting for any comments relating to the economic slowdown or the timing of monetary policy action including a possible further round of TLTROs (low-cost, long-term funding to eurozone banks).

Elsewhere, sterling is likely to shrug off public sector borrowing figures and continue to be dominated by Brexit-related headlines, despite expectations of a budget surplus for the first time in almost a year. Meanwhile, the US dollar is likely to take its lead from both initial jobless claims and durable goods orders figures, both released in the afternoon session, though the latter data point is for December hence paints a dated picture of the economy. The only other notable economic data comes from Japan overnight, with the latest National CPI figures expected to show inflation increasing to 0.8% on a year-over-year basis in January, still a long way short of the BoJ’s inflation target.
Finally, markets will have a plethora of central bank speeches to digest with the most significant being from Bank of Canada Governor Poloz (5:30pm) and RBA Governor Lowe (10:30pm) – with the latter having the potential for Aussie dollar volatility after the RBA’s dovish shift earlier in the month. Markets will also hear from the ECB’s outgoing Chief Economist Praet, the BoE’s Chief Economist Haldane and typically centrist Fed member Bostic.

Today's Economic Calendar

Time Currency Release Consensus Previous
09:00 EUR Manufacturing PMI 50.3 50.5
09:00 EUR Services PMI 51.4 51.2
09:30 GBP Public Sector Net Borrowing -11.05bn 2.11bn
12:30 EUR ECB Meeting Minutes
13:30 USD Durable Goods Orders (m/m) 1.7% 0.7%
13:30 USD Initial Jobless Claims 229k 239k
23:30 JPY National Core CPI (y/y) 0.8% 0.7%