Weakened USA, weakened EU
Coming up to the USA’s federal government shutdown, the American economy was in acceleration mode. Although new data are scant, it appears shutdown will have more negative effect than originally forecast. Traders should be prepared for disappointment. The US yield curve continues to flatten; consumer sentiment has weakened. The chaos on Capitol Hill mirrors the real effect of the shutdown on American life.
Meanwhile in the EU, most of the negatives, especially weak German growth, have been priced in to the single currency. Moving forward we can expect a pick up. While the global economic backdrop is hazy, fiscal conditions are loosening. Germany’s ruling party has indicated tax cuts while France has rolled back its interest rate hike. This week the European Central Bank is expected to signal a rate hike for September 2019.
Brexit stalemate confuses traders
A Brexit delay looks likely, but this does not necessarily give a resolution. If the new European Parliament votes in May 2019 not to give further concessions to the UK, including on the Irish backstop, a second referendum or even general elections in the UK are likely. For now, long GBP trades are highly speculative, although the risk of a hard Brexit is subdued for now. Traders should not get hypnotized by the hype: Brexit has now migrated from the logical to the political, making predictions merely guesswork.
Although investors are currently supporting a bullish GBP bias, that trend could rapidly change. The next event will be presentation of a Brexit Plan B later today: its reception remains highly uncertain. Postponement of the current Brexit deadline of 29 March 2019, which would require approval of the EU members, remains the most realistic solution for now. This would allow the UK to buy three more months, until EU elections kick off on 23 May.
