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GBP Under Brexit Pressure

Brexit deadlock remains. Will Prime Minister Theresa May maintain political support and win concessions from the EU? We’ll see at the next vote, scheduled for 27 February. We expect GBP/USD to decline further as Brexit fatigue weighs on traders. Currently trading at 1.2834, GBP/USD is heading along 1.2810 short-term.

Following fruitless negotiations with EU President of the Commission Juncker and EU President Tusk in Brussels, May faces resentment from lawmakers, who are concerned about the upcoming decision: either back May’s deal, vote for a “long” extension of Article 50 and try to get a better deal, or reverse the exit decision (i.e. second referendum, unilateral withdrawal of Article 50). Today’s government motion will ignore a no-deal scenario, a move that could threaten May’s leadership in the Conservative party. Once again, she risks a no-confidence. Still, today’s Parliament session will not be a game changer – that will likely come in two weeks.

Investors climb the wall of worry

Markets are watching geopolitics closely, especially the China/US trade conflict. Meanwhile, the US Federal Reserve Bank has entered “wait-and-see” mode on monetary policy and will maintain as long as economic indicators stall. US headline inflation in January eased to 1.6% annually – compared to 1.9% in the previous month a forecast of 1.7% – amid a collapse in oil prices. Core inflation came in above forecast, printing at 2.2% compared to 2.1% expected. More data is coming this afternoon: publication of January’s producer prices, initial jobless claims, December’s retail sales and business inventories. On Friday come industrial production, Michigan sentiment index, Empire Manufacturing and most importantly durable goods orders for the month of December as well as purchasing manager indicators.

The US dollar bounced back at the European opening, especially against the Australian and New Zealand dollar. Over the last days, the greenback has traded with an upward bias, remaining insensitive to economic data. Trade negotiations between the US and China are still the main driver in FX.

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