Brexit direction now in full control of the government

The new year currency markets have so far kicked off with a continuation of the theme seen in late December, with Sterling very much on the back foot as markets begin to focus on the difficult year ahead for the Pound, and for the UK economy. With the Brexit direction now in full control of the government, the subject will no longer be the focus in the House in Commons beyond 31^st January after Boris amended his withdrawal agreement before Xmas to remove any veto powers or contribution from the house on this matter. At the same time, Boris also affirmed the deadline for trade negotiations with the EU as 31^st December 2020, when we will finally complete the UK’s separation from the EU, with or without a future trading agreement.

This is the key factor that has weighed on Sterling since the election, with rates currently 3-4% lower than just 2 weeks ago. The only people who seem to believe that a trade deal can be negotiated and implemented within 11 months is Boris and his cabinet, which means the prospect of once again leaving the EU on a ‘no deal’ basis is as real as it has ever been, and this time MP’s no longer have the power to block it. Investors and traders will be inevitably weary of this and as such most bodies are forecasting a difficult year ahead for the pound, with markets very likely to progressively price in the prospect of a no-deal Brexit as we get closer to the deadline. It is in markets like these where a Forward Contract can prove incredibly valuable to protect yourself from lower exchange rates.

With the Brexit focus likely to fade into the background, we can expect a greater focus on the underlying UK data, which unfortunately leaves little to be excited about currently. UK growth was zero at the end of 2019, and last week’s PMI figures for manufacturing (47.5) and construction (44.4) both showed steep contractions.  Businesses will not know where they stand on trade until the end of the year so the uncertainty that has paralysed them for the last 3.5 years, will, unfortunately, continue for the rest of 2020 leaving little optimism of a sharp recovery anytime soon. Meanwhile, the Bank of England will keep a close eye on developments to see if a rate cut will be necessary for the coming meetings, with 2 members already voting for this at the last meeting.

The week ahead kicks off some more eco-stats to digest and MP’s return from recess tomorrow. A list of the main releases to watch out for are as below:

Monday

9:30 am – UK Services PMI (49.2 expected)

2:45 pm – US Services/Composite PMI

Tuesday

10:00 am – Eurozone Consumer Price Index / Retail Sales

3:00 pm – US non-manufacturing PMI

Thursday

10:00 am – Eurozone unemployment rate

Friday

1:30 pm – US Nonfarm Payrolls / Unemployment Rate / average earnings

1:30 pm – Canada unemployment rate