Global Themes

  • Brexit fears spoil BOE boost
  • Irish border continues to complicate talks
  • US partial shutdown, equities continue decline

GBP

Brexit fears spoil BOE boost

Once again, market participants were at the peril of a whipsaw market on Sterling crosses yesterday, following the Bank of England's (BOE) monetary policy decision. As expected, the BOE voted unanimously to keep interest rates on hold at 0.5% but Sterling surged higher as the central bank signaled that rate hikes could come sooner and more frequently than previously thought. Expectations of a May rate hike now stand at about 75% (source: Bloomberg). In addition, the BOE forecasts wages to rise faster than inflation this year and upgraded its outlook for UK and global growth, emphasising yesterday’s ‘hawkish’ sentiment.

The initial reaction saw a stellar surge from Sterling as GBP/USD spiked over 1% to circa $1.4050 and GBP/EUR leapt to around €1.1450. However, the pound was thrown a curveball in the form of Brexit, and the gains were quickly reversed. The BOE has repeatedly voiced concerns over Brexit and the negative impact leaving the European Union (EU) could have on the economy, and it seems traders are just as cautious.

  • Despite the positive GBP reaction to the BOE’s ‘hawkish hold’, Sterling bulls quickly got a reality check as the bears pounced on the negative Brexit news that hit the headlines. The pound could face extended downside risk today if manufacturing and industrial output data disappoints. The figures for December will be released at 9:30am along with the UK’s goods trade balance.
Irish border continues to complicate talks

The complicated week of Brexit talks enter their final day and the issue of the Irish border is still seemingly the biggest bone of contention. UK negotiators have reportedly been warned that the EU will stipulate that Northern Ireland will have to stay in the customs union and the single market if there is to be no hard border (source: Guardian). This is an important ongoing issue because of the complications it will cause UK Prime Minister Theresa May with both the Democratic Unionist Party (DUP) and the hard Brexit supporting members of her own party, who will both strongly oppose this. The withdrawal agreement is expected to be produced in the next two weeks by the EU and it has been reported that this stipulation is in the draft bill.

Sterling’s position as a result of this is set to be a complicated one. We have seen this week the effect that Brexit talks, and the splits they cause in the UK government, can have on the pound. The process is unlikely to get any less complicated in the short term, and those favouring a ‘hard’ or ‘soft’ Brexit look very unlikely to compromise those views, so the uncertainty and pressure on the Prime Minister should continue.

  • However, if the UK government really does not want a hard border at any cost, and if giving Northern Ireland access to the customs union and the single market is the only way to do it, then this could be Sterling positive in the long run. Businesses have been calling for the UK to have a degree of access to these and if it looks like the UK could have a way of staying in, in some form, this could boost the pound.

USD

US partial shutdown, equities continue decline 

The US Government missed a midnight deadline to pass a new budget legislation triggering a technical shutdown. Disagreements between party members over adding an additional $300 billion in spending for the next two years certainly won’t help with the situation regarding stock markets. After the mid-week rally in equities, Thursday saw traders continue to dump stocks.

Conflicting views on the equity situation can also still be seen in currency markets. Usually, in times of uncertainty and concern, safe-haven assets benefit; assets such as the Japanese Yen or Swiss Franc. Both have strengthened slightly but not to the extent one would expect given the moves seen in equity markets.

  • A report in Bloomberg suggests that there could be large players who have leveraged positions against the prospect of low US interest rates, and now this no longer looks to be the case they are having to act quickly. Traders and market participants seem to be reducing risk by closing out positions rather than taking new speculative ones, according to the Bank of Tokyo-Mitsubishi UFJ in Tokyo.



Western Union Business Solutions has based the opinions expressed herein on information generally available to the public. Western Union Business Solutions makes no warranty concerning the accuracy of this information and specifically disclaims any liability whatsoever for any loss arising from trading decisions based on the opinions expressed and information contained herein. Such information and opinions are for general information only and are not intended to present advice with respect to matters reviewed and commented upon.

Deliver the Daily Currency Market Analysis to my Inbox

Published five days a week, this newsletter provides day-to-day trends and activities affecting the market in easy-to-understand snapshots.