Currency Note

Theresa May defeated again on Brexit

By Erin Harding February 15th, 2019

Theresa May defeated

The day began with reports that Theresa May could lose the latest Brexit vote which caused the pound to weaken against the dollar to fall below the $1.28 mark – its lowest mark for one month. And so it proved, as the prime minister – who was not present in the House of Commons – was defeated by 303 votes to 258. It is another example of May losing control of her party in the final weeks before the UK is set to leave the EU.

In truth, the result of the vote could be considered symbolic rather than anything else. However, it has real ramifications: May will now find it very difficult to say that she has the backing of the Commons for her strategy, which serves to undermine her position even further. Second, the EU are unlikely to offer any real changes to what has already been agreed, as they will simply not believe that May can get anything through Parliament.

Meanwhile, Germany’s latest GDP growth rate figures showed the eurozone’s largest economy narrowly avoided a technical recession in the fourth quarter of 2018. In the third quarter, the economy shrank by 0.2% and if there are two consecutive quarters of contraction, it is a technical recession. As it was, the economy actually posted a figure of 0%. However, the reading will be of some concern to the eurozone, although some economists expect Germany to bounce back in the first half of 2019.

Retail sales in America surprisingly slid in December, which ruffled a few feathers on the currency markets and on Wall Street. It is possible that the recent government shutdown deterred Americans from spending lots, but then again, it could be evidence that the US economy is slowing. We will know more in the near future.

One thing we learned overnight is that Congress has approved a deal to prevent another government shutdown and Trump is going to sign it. However, he will also declare a national emergency to secure funding for a border wall which he assured the American public Mexico would pay for. It is believed that Democrats will make a legal challenge to his declaration and that this will be successful. Let us hope so – when you give someone like Trump unbridled power, who knows how he will use it.

Today we have retail sales from the UK, as well as December’s trade balance figures from the eurozone. Finally, in the US, we will see the industrial and manufacturing production figures for January. There will also be continued talk of last night’s Brexit vote and what it means for the negotiations moving forward. In the meantime, there is still time to get hold of a copy of our currency forecasts if you haven’t already done so. The next edition won’t be out until April and they’re free to download, so there’s no real reason not to.

GBP: Theresa May defeated yet again on Brexit

There were no major economic data releases from the UK yesterday, but sterling slid once more against the dollar, following reports that the government could lose the latest Brexit vote. The pound fell below the $1.28 mark to hit a one-month low against the greenback. It also lost some ground against the euro, but the moves were more slight because any Brexit-related news obviously affects the eurozone as well as the UK.

And then came the vote on a government motion, which was defeated by 303 votes to 258. Her strategy failed to win support from the European Research Group who abstained. It weakens May’s already incredibly weak hand. It feels more and more that the UK is a rudderless island, floating towards catastrophe. Any bargaining power we might have had with EU leaders is surely gone now that May just cannot be confident she will gain the support of the Commons.

January’s retail sales figures will be released this morning and are expected to increase from the previous month. Year-on-year, a move up to 3.4% from 3% is expected, while month-over-month, the reading is expected to come in at 0.2% from -0.9% in December. The Bank of England’s chief economic, Andy Haldane, is also set to deliver a speech at 11am. It will be interesting to see if he has anything to add to Carney’s recent Brexit comments.

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EUR: Germany narrowly avoids recession

The eurozone’s largest economy is on the precipice of recession, as Germany’s economy failed to grow in the fourth quarter of 2018. The latest GDP growth rate figures were expected to climb to 0.1% from -0.2% the previous quarter, but the figure came in at a round 0%. A technical recession is two consecutive periods of decline, so Germany has just avoided one, although that will provide little comfort at the moment.

The reading means that the German economy has failed to post any growth since June 2018 and in the third quarter, the negative reading was the first time GDP shrank since 2015. Still, some economists believe that the economy will pick up in 2019 and rebound in the first half of this year. There are four main reasons behind the disappointing showing: the global slowdown, Brexit, car troubles and the weather.

GDP growth across the eurozone as a whole was more stable and held steady at 0.2% to fall in line with expectations. The number of employed people across Europe increased by 0.3% in the fourth quarter following a 0.2% gain in the previous quarter and above expectations of 0.2%.

Today we will see the eurozone’s balance of trade figures for December. Last time around, there was a surplus of €19 billion, so it will be interesting to see whether this expands or contracts this time. Regardless, these are worrying times for the eurozone at present and the GDP readings for the first quarter of 2019 will be much anticipated.

USD: retail sales take an unexpected drop

There was some surprising data from the US yesterday, as December’s retail sales figures showed a drop of 1.2%. It is the biggest drop since September 2009, when the US was just coming out of a recession. The markets had been expecting an increase of 0.2% which should help highlight what a surprise it was.

It could show one of two things in all probability; the recent government shutdown deterred Americans from spending as much as they would ordinarily spend, or the economy is slowing. The next retail sales release will be watched closely, as well as additional economic data in the coming weeks. The dollar had been doing rather well against the euro until the release, but it nosedived shortly after and the euro managed to climb back towards $1.13.

Initial jobless claims increased by 4,000 to 239,000 up to 9 February 2019 from the previous week’s revised level of 235,000. The markets had been expecting a figure of 225,000 so the release was slightly disappointing. However, the aforementioned retail sales was the main talking point in America. Apart from the fact that Congress has approved a shutdown deal and Trump will likely sign it and then declare a national emergency.

It is a fairly busy end to the week for America, with the latest manufacturing and industrial production figures scheduled for release. We will also see the preliminary reading of February’s University of Michigan’s consumer sentiment.

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