Week Ahead: Brexit Plan B And ECB On The Agenda

Market Analysis /
21 Jan 2019



With Wall Street is closed on Monday for the Martin Luther King memorial holiday, index futures are currently set very much on the back foot. Optimism over a resolution being found for the US – China trade deal is failing to provide any meaningful cheer and those disappointing GDP figures from China over the weekend certainly aren’t delivering any upside, either. There’s also the ongoing matter of the US government shut down, although signals from the White House do seem to suggest that Donald Trump is willing to offer concessions, whilst the Democrats are in a position to approve some kind of physical barrier on the Mexican border.

There’s certainly the potential for good news to emerge later in the week on the political front, although earnings season remains in full swing and again, disappointment here could heap downside pressure on already-struggling US dollar. That GDP print from China lays clear the fact that an economic slowdown is underway and with this looming large, investors could well be wary about inflating equity valuations any further. The main data releases for the U.S. Dollar in the week ahead are Manufacturing and Services PMIs for January, which are out on Thursday. Retail Sales data for December was supposed to be released last week but had to be postponed because of the government shutdown which is now affecting departments which compile economic data. There is a chance, however, that it could be released in the week ahead, and if so, it could impact on the Dollar.



The Eurozone will be dominated by the European Central Bank rate setting meeting this week, but yet again we expect no change in the major rates or policy. Although not much is expected at the meeting the Euro will be watching what is in the statement and what President Mario Draghi has to say in his press conference. There will be particular focus on the outlook for the Eurozone economy in the wake of the sharp slump in the second half of 2018 growth numbers. Draghi will likely be quizzed on what the ECB plans to do if the Eurozone growth picture continues to deteriorate.

As for the rest of the week it will be sentiment data and PMI’s that provide the focus with both manufacturing and services readings due for release on Thursday morning.



Sterling has been trading near recent highs against the Euro, US Dollar and other major currencies at the start of a new week that promises to offer further political intrigue and Brexit anxiety. The Pound's ongoing 2019 recovery is built on an emerging view that the prospect of a disruptive 'no deal' Brexit will be avoided as the parliamentary arithmetic and a fast approaching deadline make it all but certain the March 29 Brexit day will be pushed back further into the year.

On Monday, Prime Minister Theresa May will reveal to parliament the shape of the government's "Plan B" Brexit deal with the hope that lawmakers will unite behind the proposed changes, an outcome that would ultimately be welcomed by markets and a British Pound that is craving certainty. A lack of any real substance this week will leave the Pound in limbo again as the UK floats towards the abyss.



A weaker oil market and the back end of 2018 means that this week’s retail sales data takes on greater importance with slack looking to be picked up by consumer spending. The rest of the week will be focused on manufacturing data, as well as any ongoing developments between the US and China, especially after the China growth figures.

The Bank of Canada recently changed its forward guidance on interest rates, saying it was not necessarily planning any further interest rate hikes in 2019. This led to a sharp sell-off in the Loonie last week. Emerging data will be critical in deciding whether the BOC retains this neutral view or starts hiking again because it sees evidence of the economy growing.



Chinese data out Monday and U.S.-China trade talks will form the highlight for the Australian Dollar this week owing to the country's close trading relationship with China. Indeed, we have seen the Aussie Dollar more-or-less track the fortunes of China's Yuan over recent months, therefore bad news in China tends to be bad for the Aussie Dollar. Chinese GDP did however meet expectation on Monday, which led to the Australian Dollar pushing slightly higher. GDP out of China stood at 6.4% year-on-year and 1.5% in the final quarter of 2018.



The main release for the New Zealand Dollar in the week ahead is probably quarterly inflation data which is out on Tuesday. Q4 CPI is forecast to show no change on a quarterly basis and a 1.8% rise compared to a year ago. The reason it is important for the Kiwi is because it informs central bank policy regarding interest rates. If inflation rises the bank puts up interest rates and this also usually results in a rise in the value of the currency. Higher interest rates appreciate the local currency by attracting and keeping greater inflows of foreign capital drawn by the promise of higher returns.

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