GBP: Looking for support
Sterling was torpedoed on Friday night by the resignation of Jo Johnson, Transport Minister in Theresa May’s government and brother of Boris. His arguments against Theresa May’s Brexit plans call on Remain-supporting Conservative MPs to break ranks and vote down the government’s plans, much as the Brexiteer elements within her party have threatened to do for months now. One would have to say that Chequers is dead now.
The main issue remains the Northern Irish border and nothing that has been said over the weekend will change that so either the plans for Brexit need to change or the political ideology on both sides of the Channel needs to change as the current plans have left us at a stalemate.
Sterling’s reaction to this should be no great surprise; without a government deal the next highest likelihood is a no-deal scenario. We maintain our belief that a no-deal scenario is around a 1-in-4 bet at the moment, however the chances of a deal have fallen and the probabilities of ‘something else’ – another referendum, an extension or pause to Article 50, a general election – have risen. There will be an emergency Cabinet meeting today.
Friday’s GDP figures have been long forgotten about and while this week’s run of inflation, employment and retail sales numbers are more pertinent, the current environment on Brexit is more than enough to smother sterling optimism. Another couple of resignations could be all we need for another down leg.
GBP/USD should be able to find support at about the 1.27 level in the meantime with GBP/EUR likely to call on help at about 1.1330.
EUR: Back to Budgets
We’re back to talking about the Italian budget this week. Tuesday will likely see the Italian government respond to the EU’s demands of budget revisions but whether that change is any way conciliatory is another matter entirely. From a political point of view and as long as the local equity market and Italian debt markets remains calm, we expect the Italian government to continue thumbing its nose at the European Union.
Italian industrial production numbers are due today although Wednesday’s look at German GDP will be the main data point for the euro this week. We could very easily see the quarter-on quarter number turn negative as slowing consumer spending is not enough to take up the slack from a trade picture hurt by the wider contraction in global trade.
USD: Policy pause
Gridlock is coming in US politics courtesy of the Democratic victory of the House in last week’s Midterms. What happens to the dollar in the short term has been largely negative with November so far being the most negative month for the currency since March.
We expect that the majority of the recent weakness has been the market pricing out the chances of another change in fiscal policy – tax and spending – that could keep the US economy in its current ‘overdrive’ setting. That said, it’s difficult for any politician to vote against tax cuts for the middle class and I reckon we’ll be back to talking about them again in Q1.