GBP: Method In The Madness
Theresa May’s plan is dead in the water and both parliament and sterling traders will once again be working late tonight to deal with the Labour motion of no confidence in this government. In the wider picture not much has changed: we knew it was likely that the plan was not going to pass the House of Commons – although the margin of defeat was a surprise – and Labour was always going to call a confidence vote – though we thought Labour may wait a little bit longer.
There is a lot of political chicanery within this confidence vote as it is still not clear who benefits most from calling it. Of course, we cannot rule out multiple confidence votes in the next 72 days as parliament reacts to a lack of progress on Brexit or hardening of a government position around a stance that has no support – i.e. no-deal.
We think that tonight’s confidence motion has a low chance of passing given the age-old knowledge that MPs hold nothing more precious than still being MPs and for now Party will trump Country. A defeat for her would likely lead to an election although the rules dictate that May has two weeks to form another government before we move to a general election.
Sterling ran higher in the aftermath of the vote as it seemed clear that Theresa May was keen to rule out a no-deal scenario and finally bring in members of other parties to form some consensus on what Brexit needs to look like. Similarly, the low likelihood of a government defeat in tonight’s confidence vote and a lower chance of a Corbyn/McDonnell axis in Downing Street will have helped sterling.
Where the pound goes from here will have to depend on what new plans are announced on Monday but we can expect the weekend’s papers to be full of chatter of a delay or outright revocation of Brexit. This would be sterling positive.
For now, Sterling is living on borrowed time and is currently running the risk of crashing lower as the UK crashes out or soaring as another referendum is confirmed. While we have expectations about what is more likely, headlines and rumors will continue to swing the pound around with scant regard for precedent.
Away from the mess that is Brexit, the dollar was having a volatile day of its own as three members of the Federal Reserve once again tempered the language around further interest rate hikes.
Minneapolis Fed President Kashkari said that there is no need to tap the brakes on the economy, that wage growth hasn’t really taken off yet, and that sees no evidence to support further hikes. Kansas City Fed President George, known to be one of the most hawkish members, said: “it might be a good time to pause our interest rate normalization, study the incoming evidence and data, and verify our current location.” Similarly, Dallas Fed President Kaplan said he too supports a wait and see approach.
What could change this mood shift is data but, for now, the data is not supportive enough and the dollar is set to remain in the crosshairs especially should the government shutdown remain in place for much longer.
EUR: Draghi Shifts Expectations
European Central Bank President Mario Draghi confirmed the subdued nature of the European economy. Presenting the ECB’s 2018 Annual Report in Strasbourg, Draghi confirmed that growth and economic performance had been weaker than expected, but that the level of interest rates currently, guidance on where they will go in the future and the Bank’s quantitative easing program provide the necessary support.
EUR/USD has endured a tough couple of days and will be hoping for a calmer end to the week.