May wins no confidence vote, is an Article 50 extension next?

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17 January 2019

thomasdodds

Sterling traded within a relatively narrow range on Wednesday, with investors breathing a sigh of relief after Theresa May survived her vote of no confidence.

T
he Prime Minister was heavily expected to pass last night’s vote although it did, in the end, prove relatively close. With the vote now out of the way, and the risk of a snap general election averted for the time being, attention in the UK now turns to Monday, with May obligated to inform the House of Commons how her government intends to proceed with Brexit.

Currency traders have taken on a relatively more optimistic view on Sterling since the parliamentary Brexit vote, with the Prime Minister now heavily expected to signal an intention to extend Article 50 and delay the UK’s exit from the European Union. As we mentioned yesterday, not only does this allow for time for additional negotiation, it also increases the chances of a slightly softer Brexit that avoids the worst case ‘no deal’ scenario.

Euro holds after soft German data, dovish Draghi

Aside from Brexit, the main story in the currency markets this week has been the growing concerns regarding the Eurozone’s economic performance.

The common currency has shed around one-and-a-half percent in the past seven days. First up, we had some very soft data out of Germany that suggested Europe’s largest economy barely grew in the fourth quarter, having contracted in the three months to September. President of the European Central Bank, Mario Draghi, also delivered another dovish assessment of the bloc’s economy on Tuesday, further pushing back calls for the first interest rate hike in the Euro-area since 2011. Draghi stated that while a recession was not on the horizon in the Eurozone, data had been weaker-than-expected and that ‘a significant amount of monetary policy stimulus was still needed’.

Next up will be this morning’s Eurozone inflation numbers. No revision is expected, with core inflation expected to have remained stuck at 1.0% in December, well short of target.

US government shutdown drags on

The US Dollar was equally flat against most of its major peers yesterday, with a relatively quiet period of economic news leading to a fairly uneventful trading session.

The main headline across the pond undoubtedly remains the ongoing government shutdown, which entered into a record fourth week this week. Currency traders do, however, so far appeared fairly unconcerned, with the US Dollar gaining in four of the past five trading sessions. That being said, the longer the stalemate drags on, the greater chances the shutdown begins to filter its way through to softer economic data and a weaker greenback.

The next couple of days also looks set to be relatively quiet in the US and the Dollar is likely to be driven more by politics than macroeconomics. A handful of Federal Reserve member speeches, namely that of Quarles and Williams, could shift the greenback.