Global Themes

Sterling suspended near 2018 lows
- GBP/USD flirting with $1.26 level
- GBP/EUR drifting sideways, German data eyed
- Dollar down - EUR/USD edges towards $1.14

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The Brexit deadlock and deeply divided British Parliament continues to unnerve investors and keep Sterling languishing near year-to-date lows.
A motion of no confidence in the Ms May’s government was tabled by Labour leader Jeremy Corbyn in Parliament yesterday, though this measure is unlikely to appear until January. With just over 100 days before Britain is set to leave the European Union (EU) on March 29, UK Prime Minister Theresa May intends to re-schedule the delayed vote on the withdrawal agreement in mid-January. The “meaningful vote” in Parliament was postponed last week over risk of significant defeat, and PM May then survived a confidence vote triggered by her own party. The EU is offering little in the way of concessions and the Brexit gridlock groans on. Rumours of a second referendum continue to be shot down, although increasing speculation will likely bolster the pound. The threat of crashing out the EU without a deal still remains high though and based on historic price action, Sterling would sharply depreciate in such a chaotic scenario.


GBP/USD flirting with $1.26 level
- Down over 4% since November
- $1.27 and $1.32 short and long-term resistance levels respectively
- $1.25 and $1.2350 should offer short to medium term support

GBP/USD continues to hover around the $1.26 mark, buoyed by Brexit reversal hopes and weighed on by the political disarray and risk of a chaotic no-deal Brexit. US and UK central bank meetings on Wednesday and Thursday respectively also pose currency volatility risk.

The salient risk to Sterling is Brexit, and with no top-tier data due from the UK today, British politics and Brexit headlines will steer Sterling’s direction. Unless, Labour do decide to officially call a no confidence vote in the Prime Minster, it is likely that GBP/USD will continue oscillating between $1.25-$1.27. However, UK inflation data and the Bank of England’s monetary policy meeting later in the week will also be closely watched, and could trigger erratic price swings should any surprises transpire. Important housing data is due from the US at 13:30 and the US Federal Reserve’s (Fed) two-day monetary policy meeting kick starts today. The Fed is widely expected to raise interest rates tomorrow, but the key focus lies on the Fed’s future rate hike projections. Dollar demand might cool if dovish tones surface, although its high yielding appeal in such uncertain times should limit any losses.


GBP/EUR drifting sideways, German data eyed
- Down over 3.5% since November
- Only closed the week above €1.15 once since Q2 2017
- Only closed the week below €1.11 once since Q3 2017

After a relatively flat trading day for the Euro yesterday, this morning might offer some volatile price action. Top-tier German IFO surveys for December will be released at 09:00 and the headline business climate index is expected to deteriorate to 101.7 from 102.0 in November. If in line with forecasts, this will be the fourth consecutive monthly drop in business confidence and could weaken an already fragile Euro. Consequently, GBP/EUR could attempt to crawl away further from the €1.11 area, though moves beyond €1.12 seem unlikely as long as Brexit uncertainty prevails.

Positive rhetoric from Italy with regards to its new 2019 budget plan is keeping Euro sentiment modestly stable though. It appears Italy’s coalition government has agreed on the latest amendments to the budget, cutting 2019 GDP growth forecasts to 1% from 1.5% and targeting a 2% deficit rather than 2.4% previously. Despite this positive development, the political fragility within the EU continues to keep investors on their toes and with Eurozone growth and confidence indicators declining, appetite to invest in the common currency wanes.


Dollar down - EUR/USD edges towards $1.14
- Down over 3.5% since October
- $1.13-$1.14 trading range since November
- $1.09 long term downside support

US President Donald Trump has hit the wires once again criticising the Fed’s decision to hike interest rates ahead of its rate decision and forward guidance tomorrow evening. Having stretched to a 19-month peak yesterday, the US Dollar index, which tracks the dollar’s strength against a basket of currencies has pulled back towards the 97 handle.

US Treasury yields also continue to slump, which is weighing on demand for the US currency. The yield on the 10-year has fallen for three days straight now and is approaching 3-month lows, spooking investors concerned about a US recession. EUR/USD has clawed its way back into the higher realms of the $1.13-$1.14 range as a result. Gains will likely remain capped at $1.14 though, which has proved a strong ceiling of resistance over the past few weeks. The US Dollar does remain the sought after safe haven currency, so while political risks remain elevated in the global arena, dollar weakness is likely to remain limited.

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