May asks for more time, Carney warns of no deal ‘shock’

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13 February 2019

thomasdodds

Sterling edged lower against the Euro on Tuesday after UK Prime Minister Theresa May outlined to the House of Commons her next steps in the Brexit process.

T
here were no real surprises from the Prime Minister. May stated that more time was needed to achieve concessions from the European Union regarding the NI ‘backstop’ and that the next meaningful vote on her agreement will not take place for another couple of weeks. Investors continue to treat Sterling with caution, a mere 44 days to go until the UK is scheduled to leave the EU.

Governor of the Bank of England Mark Carney also continued to talk up the risks of a ‘no deal’ Brexit yesterday, suggesting that leaving the EU without a deal in place could lead to an ‘economic shock’. Speaking at the Barbican Centre in London, Carney stated that it was vital the UK secures a smooth transition so as to avoid ‘undercutting growth and prosperity for all’.

Carney’s warnings come a matter of days after the bank sharply revised lower growth forecasts for the UK to just 1.3% for 2019. That being said, our base case scenario remains a delayed Brexit that opens the door to another BoE rate hike towards the end of 2019. Our conviction of this is wavering somewhat, however, given recent soft economic news. The market is now pricing in around a 30% chance of a hike before the end of the year versus closer to 50% before the release of the disappointing fourth quarter GDP number earlier in the week.

Dollar falls on hopes of US-China trade deal

Emerging market currencies were buoyed yesterday by an improvement in risk appetite following the news that an agreement was reached between the Republicans and Democrats that would keep government open in the US. While Trump is said to be displeased with the deal, he doesn’t expect another shutdown, which is unequivocally good news.

Moreover, Trump is said to be willing to let the 1st March ceasefire deadline on new Chinese trade tariffs ‘slide for a little while’. This is encouraging news that is very much in line with our view that concerns over an escalation in the trade war between the two economic superpowers are overblown. We are more optimistic than ever that an agreement between the US and China over trade is reached in the next few weeks – an outcome that should help support risk assets in general. The safe-haven currencies unsurprisingly lost ground on Tuesday, with the Euro able to rally by over half a percent against the greenback. We also saw strong gains for the high yielding Australian and New Zealand Dollars.

Next up will be this afternoon’s US inflation numbers, expected to show that consumer price growth fell to just 1.5% year-on-year in January – well below the Fed’s 2% target.