Post date: 18/03/2019 08:00
British politics again dominated FX markets last week. As we expected, Parliament rejected the deal with the EU again by a large majority, but then proceeded to reject a no-deal Brexit and back a delay in the March 29th deadline. Optimism that the worst case scenario had been ruled out took Cable to its highest levels since July of last year. European currencies joined the pound in celebration, as the ensuing worldwide rally in risky assets put a bid on all G10 currencies save the traditional safe havens, the Japanese Yen and the Swiss Franc.
This week, the March meeting of the Federal Reserve on Wednesday will shift traders attention back to monetary policy. British politics will still move markets, as Theresa May puts her deal with the US to a third vote in Parliament on Tuesday. Finally, the release of the flash PMI indices of business activity in the Eurozone on Friday will give us a critical read on the true state of the economy there.
All Brexit, all the time. The three key votes last week went as we expected: no to May’s deal, no to no-deal Brexit, and yes to an extension. Theresa May now goes for a third try on Tuesday. We expect it to be a closer vote than last week’s, but still a rejection, as the gap in support is too large to bridge. If we are wrong and the deal passes, we can expect a significant Sterling rally on top of last week’s rise, however. The focus will now be on the EU summit over the weekend, which is expected to deal with a request for a formal delay of the March 29th deadline. The longer the delay, the further the Pound will rally, in our view, as markets will start pricing in the possibility of a second referendum.
Last week, industrial production data for the month of January generally surprised to the upside in the Eurozone. We note that in spite of the gloomy commentary on the Eurozone economy, the tone of actual economic releases has taken a clear turn for the better over the past couple of weeks. Our positive view will be tested Friday, when the key PMI indices of business activity are released. We expect a surprise to the upside, particularly in manufacturing. This could well ignite a modest Euro rally back towards the middle of its range of the past few months, near 1.15.
Focus for this week will be of course on the key Federal Reserve meeting on Tuesday and Wednesday. No change is expected on the level of rates. The Fed is expected however to announce that it will restart reinvestment of the bonds in its balance sheet as they mature, a modestly simulative decision. The key will be the “dots plot” that conveys the FOMC members own expectations regarding the future path of rates. We expect this to show no rates are foreseen in 2019 by the median committee member, a slightly more dovish outcome that is priced in by most strategists. Therefore, we think that on balance the dollar is more likely to suffer next week.