Week Ahead: Brexit vote part 2 and the US government shutdown

Market Analysis /
28 Jan 2019

USD

US President Donald Trump and Congressional leaders reached a deal to reopen the government for three weeks until the 15 February, following the longest shut down in US history. The issue with this is that none of the stumbling blocks that previously halted any agreement have been covered, most notably the funding for the border wall. This means we can’t rule an extension to the shut down after that three-week period.

It’s a busy week for US economic data, and it will be the data releases that dominate the direction for the US dollar. The highlight will be the Federal Reserve policy decision, however if there was an uptick in sentiment over the temporary reopening of government then that was quashed by fears that the Fed will slow down the reduction of their balance sheet (removal of quantitative easing measures) in line with their more cautious plan on rates given the global economy fears. It is all but certain that the Fed will leave rates on hold on Wednesday, after Fed Chair Powell had signaled patience and flexibility with policy after last year’s 4 rate hikes. Although the Fed may not be overly dovish on Wednesday it is expected they will continue to show caution over the current economic situation. This week also sees the US jobs report, which again will be closely watched by US dollar.

 

EUR

The Euro suffered some extended downside at the back end of last week after ECB President Mario Draghi stated in his press conference that he now believes that the outlook for the Eurozone economy has moved to the downside. Thursday’s Eurozone GDP reading will give investors a little more insight into just what the picture looks like with the number expected to show 0.2% growth for the fourth quarter of 2018 with the year on year number expected to show 1.2%.

Those with Euro risk must be cautious of a number coming in below expectations, as further negative news around the bloc would have a negative impact on the currency, but also cause bigger questions to be asked about just how deep the economic issues go within the Eurozone.

 

GBP

It’s another huge week for the UK as the Brexit debacle rolls into a second vote with time slowly running out before we hit the March 29 deadline. The prime minister will take her Brexit Plan B to the house of commons to be voted on for a second time on Tuesday, however expectations are that yet again the PM will lose the vote. This is despite fresh hopes that the Democratic Unionist Party (DUP) had softened their approach on the Irish backstop issue. The issue that has been the biggest stumbling block throughout the whole process.

Even if the DUP does give it’s support to the government it’s very likely that it would still not give the PM enough votes to push this plan through the House of Commons. So yet again the issue remains that nobody has any idea what to expect after this vote. With the most likely scenario being that Theresa May has to go to the European Union and ask for an extension to Article 50, something that has previously been ruled out. What happens after that is still anyone’s guess.

CAD

The Loonie remains undermined by renewed concerns about the slowing economy, both globally and domestically after last week’s retail sales numbers suggested that the economy may well have contracted in November. The data last week adds itself to more data based evidence that the overall Canadian economy may well be slowing. This makes Thursday’s GDP reading all the more important as expectations show a suspected contraction of -0.2% in November, falling from Octobers 0.3% gain.

The numbers will add to the fact that recent data has shown a slowdown in retail, wholesaling and manufacturing activity, with other areas of the economy not providing enough of an offset to support the downturn. The news will support the Bank of Canada’s view that the time is right to sit on their hands and not change policy or continue with rate hikes.

 

AUD

Without doubt, broader investor sentiment will likely remain in control of the Aussie Dollar over coming days, with readers urged to pay particular attention to the performance of Chinese stock markets. There remains a strong correlation with the overall health of China and the Australian Dollar owing to the fact China is Australia's largest export market.

China's markets have lifted in 2019 amidst improved sentiment with regards to the U.S.-China trade spat, with both sides showing a clear willingness to negotiate a solution that would prevent the imposition of further tariffs in Chinese exports destined for the U.S. Investor sentiment should show an improvement at the start of the coming week on news that the U.S. government shutdown will temporarily end.

 

NZD

Trade balance data will be the big focus domestically in New Zealand this week while the ongoing drama in Washington and the global economic downturn will be the focus for the rest of the week. With very little due for release for the rest of the week it will be the US data that also remains a focus. With the US jobs report and the Fed rate decision before that there is no shortage of global stories that could spark the Kiwi into life as the week moves on.

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