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Currency Market Analysis

Oct 16, 2019 | Currency Market Analysis

Global Themes

Crunch day for Brexit
- Sterling slips from 5-month peak
- Will a deal pass in Parliament?
- Markets wince at IMF growth warning
- UK inflation eyed
- Eurozone final inflation

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GBP

Sterling slips from 5-month peak
Buoyed by Brexit optimism, the British Pound is just about holding onto its mammoth gains over the past week, although it has slipped from 5-month peaks this morning.Yesterday, GBP/USD surged nearly two cents from its lowest level on the day to clip the $1.28 handle – a 5-month high.

The pound weakened earlier yesterday, with GBP/USD wilting towards $1.26 and GBP/EUR under €1.14, but following a Bloomberg report citing a deal was within grasp, sterling demand surged. GBP/USD took out the 200-day moving average, a closely watched technical level, and accelerated towards highs not witnessed since May. GBP/EUR also jumped 1.4% to nearly test €1.16. The twists and turns of Brexit are causing unusually wild swings in sterling, but overall the mood music is positive, and sterling has risen nearly 5% since last week.

Meanwhile, GBP/AUD tears towards A$1.90 as the pound strengthens and the AUD weakens amid US-China uncertainty. GBP/AUD has rallied a whopping nine cents since last Thursday, but his currency pair is arguably overbought, and a pullback should be expected. 

Brexit

Will a deal pass in Parliament?
Amidst the amplified optimism though, there is still room for scepticism as whatever deal is agreed still needs to pass through UK parliament. The ten Democratic Unionist Party (DUP) lawmakers will play a key role, and if the new deal is voted down in Parliament, sterling may relinquish its recent gains.

The DUP voted against Theresa May’s Withdrawal Agreement three times and this deal looks worryingly similar. The UK and EU are on the cusp of confirming a draft text of a new deal, which includes details on a customs border down the Irish Sea. This avoids the controversial hard border on the island of Ireland. The so-called “landing zones” for customs checks effectively keeps Northern Ireland inside the UK’s customs territory (to benefit from UK-wide trade deals struck) while remaining in the EU customs territory too to ensure EU customs checks and controls are carried out on goods entering the region. The EU is concerned the new complex system may be exposed to fraud and smuggling. Intense technical talks continue.

The obvious challenge is that PM Johnson’s Conservative party does not hold a majority in the Commons. Eurosceptic MPs and the DUP are proving tough to win over, but overnight the head of the hardline European Research Group said a “tolerable” deal could be reached. DUP demands for a huge cash package for Northern Ireland may be enough to swing their votes too. The deadline for a deal today. This is the last chance before the 2-day EU summit begins tomorrow, otherwise another extension may be on the cards.

IMF

Markets wince at IMF growth warning
The International Monetary Fund (IMF) has warned the global economy will grow only 3% in 2019 - its slowest pace since the global recession of 2009. The US-China trade war is the main catalyst for the slowdown, alongside Brexit uncertainty and other geopolitical risks.

The IMF predict that the “big four” economies of China, the US, the Eurozone and Japan will experience no improvement in growth rates over the next five years. Global risks are skewed to the downside and unless any major positive developments arise in relation to the US-China trade conflict and the Brexit crisis, then economic conditions may continue to deteriorate. The fund also forecasts that a no-deal Brexit could severely impact sentiment, reduce consumption and investment, job creation and growth. Many central banks around the world have been acting by loosening monetary policy in the form of quantitative easing and interest rate cuts to help safeguard their economies and lift demand.

Amid easing policy and escalating global risks, currencies could tumble bar the safe-haven Japanese Yen, Swiss Franc and high-yielding US Dollar.

UK inflation

UK inflation eyed
Although all eyes and ears remain fixated on the Brexit chatter, traders will also take note of UK inflation data which hits the headlines at 9:30am this morning. September’s month on month figure is forecast to cool to 0.2% from 0.4%, whereas the annualised number is forecast at 1.8%, up from 1.7% in August.

UK labour market data yesterday morning was weak, with employment falling the most since 2015 and wage growth slowing to 3.8% from 4.0% previously. As mentioned above though, any movement on data will likely be short-lived and overshadowed by Brexit news flow. It does paint a good picture of the health of the UK economy though and should not be ignored entirely. The Bank of England will be monitoring macro data as well as Brexit developments when it comes to making decisions on UK monetary policy.

Eurozone

Eurozone final inflation
Final Eurozone inflation figures for September are due at 10:00am today. The consensus forecast is to see inflation at 0.9% y/y, well below the European Central Bank’s close to but less than 2% target.

The Euro remains atop the $1.10 handle against the US Dollar but has heavily weakened versus the pound over the past week in light of Brexit developments. Yesterday’s German ZEW surveys showed investor confidence weakened once again in October, albeit by three ticks to -22.8 rather than the -27 that was expected. The slowing German economy and subsequent rising fears of a recession in Europe’s economic powerhouse is unnerving investors and has weakened the Euro nearly 4% against the dollar this year.

However, if a Brexit deal is agreed, we have already witnessed that this would be positive for the Euro too, as it partially reduces economic uncertainty in the Eurozone as well as the UK. Conversely, a no-deal Brexit, which is still a threat, would likely weaken both the pound and Euro significantly.


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