What An FX Mess

GBP: Leaving It To Last Minute

We may have been premature in calling last week ‘Hell Week’ given yesterday’s goings-on in both London and Brussels with announcements heightening the tension of the last few days of the Article 50 process.

Donald Tusk’s assertion that the U.K. would only be granted an extension to the Article 50 process if the Commons vote to pass the next iteration of the government’s Meaningful Vote. Brexit Minister Steven Barclay let slip yesterday that that vote could take place as early as next Monday. Without an agreement then there are only a few options for the UK: a no deal crash out, a revocation of Article 50, a confidence vote called by the Labour party or something parliamentary that wrestles control from Downing St.

One reason why sterling has remained quite so stable overnight is likely the belief that when all things are said and done, the European Union will not force a no-deal Brexit on Ireland and therefore a longer extension would be offered.

We have long used the analogy of the harum-scarum last minute of a basketball match as a guideline for the pound. The back and forth is nearly at an end and we would expect the mad scramble by both sides to kick in from next Tuesday/Wednesday. In my opinion, a long extension and/or an agreement of Theresa May’s deal are both sterling positive events.

Regardless, it’s going to be incredibly messy next week; get in touch if you would like to learn about how to protect you or your business from volatility.

Further sterling weakness could easily emerge from today’s Bank of England meeting, especially if language around the political uncertainty is stronger than the comfort that the central bank takes from the recent wage and inflation numbers.

The Bank of England announces its rate decision and the minutes of their meeting at noon. UK retail sales are also due at 09.30.

USD: Fed Dovishness Weakens The Dollar

The Federal Reserve meeting weakened the USD overnight as the central bank lowered its median estimate of interest rate movements this year to zero. This compares to a forecasted two increases in the Fed Funds rate at the December meeting.

Growth was revised lower, inflation is expected to be weak and unemployment is set to rise, albeit not markedly by the end of the year and, therefore, we have to think that the Federal Reserve may have already reached the peak of its interest rate hiking cycle. We are now amending our thoughts of a singular rate hike this year to none this year or next.

The dollar is lower across the board but we have our doubts as to whether this change in stance starts a downturn for the USD. Given the global economy’s travails, the USD still looks like a good bet for investors looking to hold a haven asset and accrue a decent yield.

CHF: Quiet In The Mountains Before Swiss Meeting

The Swiss National Bank meets today and will likely keep interest rates on hold once more. Swiss interest rates are as much a function of what is going on in Europe as what is going on in Switzerland and both have seen growth slide in recent months.

It is our expectation that both EUR/CHF and USD/CHF rise over the course of 2019. The SNB decision is due at 08.30.

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