Global Themes

Political plight bugs the pound
- No love for May’s Brexit plan B
- Will UK retail sales offer Sterling support?
- Trade talks and border issues
- Volatile dollar’s rise and fall

Brexit

No love for May’s Brexit plan B
Prime Minister Theresa May suffered another parliamentary defeat on her Brexit plan B yesterday. The result undermines PM May’s credibility and illustrates the lack of support, even across her own party, for her current course of action. After partially recovering from a sharp fall across the board yesterday, Sterling remains at risk of trending further south.

The rebels against Ms May’s motion came from both the Europhile and Eurosceptic wings. The government’s defeated motion endorsed two contentious issues that were approved separately in the parliamentary votes last month. Europhiles opposed part of the motion that endorsed the PM to replace the Irish backstop plan. Meanwhile, Eurosceptic MPs opposed the part which rejected a no-deal Brexit. Consequently, the PM lost support of nearly a quarter of her MPs with 67 choosing not to vote and five voting against.

Sterling is likely to remain on the defensive so long as the political trials and tribulations continue and a no-deal option is still on the table. To the downside on GBP/USD, the $1.27-$1.2750 zone looks to be an area of support in the short term, whereas GBP/EUR still drifts between €1.13 and €1.14. Upside  may be limited until more clarity emerges, although erratic price action cannot be discounted.

GBP

Will UK retail sales offer Sterling support?
Although dominated by Brexit news, Sterling traders will keep one eye on retail sales data released at 9:30am this morning. January’s retail sales is expected to have risen 3.4%, up from the previous month’s 3.0% y/y, which may give Sterling some respite from its recent decline.

However, if the data does meet or even beat expectations, any uplift for the pound will likely be short-lived due to the ongoing Brexit turmoil steering Sterling’s direction. The downside bias against the pound of late has seen GBP/JPY suffer three straight weekly declines, down over 2.5% over this period. The Japanese Yen is a safe-haven currency so has endured a boost in demand amidst trade war woes, political turbulence and slowing economic growth over the past year.

Yesterday, GBP/JPY suffered its biggest daily fall since the start of January and is now over 6% down over the last twelve months, potentially targeting another run towards the 5-week low of ¥140.

Trade Talks

Trade talks and border issues
US President Donald Trump has agreed to sign a government funding bill today to prevent another partial government shutdown, but he has also vowed to declare a national emergency in attempt to get further funding for the US-Mexico border wall. Meanwhile, US negotiators will meet with Chinese President Xi Jinping today in an attempt to avoid further tariffs between the two nations.

The uncertainty about what a national emergency declaration will mean for the US government and the uncertainty about the US-China trade talks has sparked a risk-off mood across financial markets this morning. If there is an extension to the March 01 deadline for a US-China trade deal, then sentiment could improve, but it is unlikely ahead of the weekend when investors would rather keep funds in safer, less risky assets.

USD

Volatile dollar’s rise and fall
The US Dollar slumped yesterday afternoon after US retail sales recorded their biggest drop in over nine years in December. The 1.2% decline m/m during the key holiday period highlights the start of the economic slowdown in the US due to softer consumer spending.

Despite the dollar pressing EUR/USD to fresh 3-week lows, the common currency pounced on the weak data from the US to retest intraday highs atop $1.13. However, the currency pair is on track to record its lowest weekly close since June 2017. This could be a confirmation of a breakaway from its recent narrow weekly trading range, and we could witness an acceleration even lower next week as a result.

This morning, EUR/USD is back below $1.13. The currency pair is down nearly 2% over the past two weeks and may target the $1.1180 area as its next key support based on an important long-term retracement level from 2017 lows to 2018 highs. 




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