Global Themes

Deal or no deal; the Brexit debate continues
- The Brexit battle boils
- GBP/USD upside limited as volatile week looms
- EUR/USD backtracks on recession fears

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The Brexit battle boils
Once again, Prime Minister Theresa May suffered a humiliating defeat in Parliament as MPs voted to cap Treasury powers in a no-deal scenario last night. Both GBP/USD and GBP/EUR edged lower as a result.

This effectively means a no-deal outcome is unworkable or at least less likely as it limits ministers’ tax-raising powers, which is expected to infuriate hard-line Brexiteers and spark further inhouse fighting. British lawmakers resume debating the current European Union (EU) withdrawal agreement in Parliament today, which could elevate market volatility.The meaningful vote on this agreement is scheduled for next Tuesday and most analysts speculate it will not pass through Parliament. PM May aborted the originally planned vote last month and then faced a confidence vote, triggered by her own Conservative party, which sent Sterling to multi-year lows. Although Sterling has since recovered, it remains susceptible to sharp and sizeable fluctuations.

It is unclear what course of action the government plans to take should this deal be rejected, which leaves investors anxious and Sterling fragile. It does seem probable though that Article 50 will be extended rather than the UK crashing out the EU without any deal come deadline day of March 29. In this case, we might expect Sterling to fall but could soon recover if the exit deadline is stretched.


EUR/USD backtracks on recession fears
Demand for the Euro has slumped somewhat as investors become fearful of the slowing state of the Eurozone economy. EUR/USD reversed course from a near multi-month high around $1.15 yesterday, but once again $1.14 held as a support.

Whispers of a recession risk in Germany halted the climb in EUR/USD yesterday following the unexpected fall in German industrial output. Global demand is waning, and German exporters are feeling the pain. Moreover, the entire bloc’s economic sentiment indicator also dropped to a 23-month low in November.

The European Central Bank (ECB) plans to leave rates unchanged throughout the summer of this year, but if lacklustre growth and disappointing data persists, the ECB is unlikely to act at all in 2019, which could weaken the common currency. Despite its recent positive rally, EUR/USD remains vulnerable to a downward shift as a result.


GBP/USD upside limited as volatile week looms
Growing optimism over US-China trade talks is increasing risk-on sentiment and helping commodity-linked currencies like the Australian and Canadian Dollar climb higher. Speculation that progress is being made thanks to the negotiations being extended is fuelling the improved market sentiment.

The rally in riskier assets as a result, could be another reason why Sterling remains buoyed above the $1.27 handle against the US Dollar. Due to the uncertain Brexit climate and the predicted volatility, the pound’s recent gains started to fade yesterday. GBP/USD bumped into resistance at $1.28 before sliding lower and ending the day in the red. This could be considered an early sign of further downside risk to come, but lots of catalysts exist that will influence the direction of GBP/USD.

The chief driver for the pound is Brexit-related updates, however traders are keeping an eye on US-China trade deal developments as well as the Federal Reserves (Fed) minutes of its December meeting at 7:00pm tonight. Although the Fed raised interest rates at this meeting, concerns about slowing global growth and the pace of future US rate hikes have limited dollar gains.

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