Global Themes

Brexit amendments to rock markets?
- Markets cheer China data
- UK Parliament key focus today
- Less GBP traders causing wild swings?
- Weak Euro hoping for GDP surprise 
- US inflation cools, but dollar warms

China Data

Markets cheer China data
Surprisingly upbeat trade figures from China released in the earlier hours of the morning has increased risk appetite and could set the tone in the market for the rest of the day, with riskier assets benefiting.

China’s imports were expected to show a 10% y/y decline in January, but instead fell just 1.5%. Exports increased a whopping 9.10% y/y as opposed to the predicted 3.4% decline. Risk on sentiment washed over markets, benefiting currencies of countries closely linked with China like the Aussie Dollar and riskier assets like stocks and commodities also cheered the news. Mr Trump also helped market sentiment this week by suggesting he might not raise tariffs levied on imports from China if the US and China don’t reach a trade deal by March 01. Today’s data along with these optimistic comments will bring a sigh of relief to market participants and the global economic outlook for now.

Brexit

UK Parliament key focus today
Hopes of a soft or delayed Brexit continue to rise as amendments to block a no-deal Brexit are gaining more support amongst MPs. Sterling remains muted for now, but the risk of volatility is elevated due to ongoing Brexit uncertainty.

The Cooper amendment, which looked to extend Article 50 if Prime Minister Theresa May failed to garner enough support for her Brexit deal, was rejected in Parliament by 23 votes last month. The same amendment is likely to be tabled again but it is not expected to be voted on tonight, but rather February 27th. This gives PM May some additional time to try and secure changes to the current withdrawal agreement, though the European Union are still waiting on realistic proposals to break the Brexit impasse.

Cutting through the political noise – if the motion to block a no-deal Brexit is passed, then Sterling should rally higher. Market participants are on their toes and listening for any developments in Parliament today or this evening, which could ramp up Sterling volatility.

GBP

Less GBP traders causing wild swings?
Sterling sprang over half-a-cent in just a few minutes yesterday before completing a round trip and slipping towards 3-week lows against the US Dollar once again. GBP/USD remains in a downtrend channel, which formed in late January.

As we get closer to the March 29 deadline, the pound is likely to remain under pressure and undergo erratic price movements as witnessed yesterday, as traders place bets on whether a deal will be approved by Parliament in time. There is an argument that GBP markets are thinning, or rather the market lacks the usual liquidity one might expect, because speculators are wary of placing bets on Sterling’s direction and getting caught wrong-footed. As a result of this reduced liquidity, an increase in volatility can be expected and might partly explain yesterday’s abrupt and sizeable movement in GBP currency pairs.

GBP/USD has so far stuck to its historic trading pattern since the referendum result, whereby in January it soars higher but February it gives up most of these gains. The deterioration in UK economic fundamentals have not helped Sterling either. The persistent downtrend in inflation saw prices cool below 2% in January, the slowest pace in two years.

EUR

Weak Euro hoping for GDP surprise
The persistent pitter patter of poor economic data continues to plague Europe and weigh on the Euro. Today, all eyes will be on flash fourth quarter GDP figures from the bloc, revealed at 10:00am. German Q4 GDP has already been released and missed forecasts, weakening the Euro.

If the overall data from the Eurozone disappoints today, the Euro could suffer an acceleration lower against the dollar, potentially dragging EUR/USD under $1.12 and allowing GBP/EUR to thrust off the €1.14 threshold and on towards €1.15. GBP/EUR has traded within a 1-cent range between €1.1350 and €1.1450 over the past two weeks having fallen back from fresh 20-month highs established in late January.

USD

US inflation cools, but dollar warms
The US Dollar outperformed most of its rivals in the market yesterday due to a number of different catalysts including inflation data and comments by US President Donald Trump. EUR/USD surrendered the $1.13 handle once again, falling back into $1.12 territory.

Inflation rose by 1.6% in January versus the 1.5% forecast, which takes it further below the Federal Reserve’s (Fed) target rate of 2%. However, as it beat expectations, it still keeps the pressure on the Fed to look at possibly raising interest rates this year, which was hinted at by Fed member Patrick Harker yesterday, who predicts one hike in 2019 and one in 2020.

Mr Trump is expected to sign a border security deal before this Friday to avoid another partial government shutdown (source: CNN). Avoiding a partial government shutdown will of course be a positive for the US economy and likely help buoy demand for the dollar. US retail sales is also in the limelight at 1:30pm this afternoon.




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