On track to leave the EU, markets stable

10 January, 2020

Tom Arnold

This week has seen relative inactivity on the currency markets with everyone taking a bit of a breather following a busy few months, where Brexit uncertainty and the resulting UK election had given us much volatility.

Instead, news pieces have dominated the wires, with the Middle East in focus and the spat between the US and Iran taking centre stage. Thankfully we seem to have seen a de-escalation from all parties, although the news yesterday that the downed Ukrainian airliner was likely shot down, rather than simply crashing, could yet bring some further tension.

For the currency markets, this brings a couple of different results. Firstly, overall risk aversion – global political uncertainty and potential wars don’t encourage investors to move funds around, and particularly don’t encourage them to take any riskier positions, instead of focusing on safe havens, i.e. major currencies. Secondly, the Middle East is obviously a major oil-producing region, and so any potential risk to the easy supply of oil is seen as negative for any nations reliant on that supply and can impact their currencies, and not forgetting oil is priced in Dollars, which is also a factor. As a result, in the early days of the week, we saw some Dollar weakness, while the situation was in the balance, but on talk of de-escalation, we have seen the Dollar surge back in strength, more than taking back the early weeks loses.

On the Brexit front, the PM’s Withdrawal Agreement was finally passed through the House of Commons and will now go to the House of Lords next week. Everything seems on track for the 31st of January deadline for us to “leave” the EU, but this is not likely to have too much impact on Sterling as the government’s majority has made this an obvious result and so markets have already priced this in.

We did see some Sterling weakness on Thursday after Mark Carney – outgoing Governor of the Bank of England – cast doubt over the UK’s growth forecasts, at the same time as taking a much more dovish line, suggesting we could see 250pips of interest rate cuts going forward. This was further exacerbated by comments from EU chief Brexit negotiator Michel Barnier, warning the Uk against leaving the EU without a deal at the end of 2020 if trade negotiations fail to deliver the much-hoped-for deal, which themselves followed comments from new President of the EU Commission; Ursula von der Leyen, playing down the chances of a deal being possible with only 11 months to negotiate.

What this means for those of you with a currency requirement, is that there is relative stability on the markets, and this will likely continue for some time to come. But with the constant spectre, for those with Sterling in hand, of the negotiations stuttering or failing and the Pound crashing on No Deal fears.

Today we have the ever-important Non-Farm Payrolls from the US, which are expected to show 164,000 new jobs were created last month in the US. As ever, if the result varies much from this, there could be significant Dollar impact.

Make sure to stay in touch with your CI account manager to keep on top of your options and to make sure you have a strategy in place to cover off the risk that exists in any currency transaction.