Brexit, ECB top this week's agenda Brexit, ECB top this week's agenda Brexit, ECB top this week's agenda

Brexit, ECB top this week's agenda

Forex 6 minutes to read
Picture of John Hardy
John Hardy

Head of FX Strategy

Summary:  Today's 'Plan B' announcement to the UK parliament and the European Central Bank's Thursday outing are this week's two tentpole events.


US president Donald Trump’s “major speech” at the weekend was a thinly veiled attempt to shift blame for the government shutdown to the Democrats as he put on a show of wanting to make a deal  without offering anything of substance. Consult the Twitterverse for all manner of sarcastic breakdowns of Trump’s approach to the situation, including those from @natesilver538. Regardless, the US shutdown is entering unprecedented territory already last week but still not getting much traction in the market – certainly relative to the 2013 shutdown, which more importantly coincided with the Federal Reserve’s starting point its slow shift to normalising policy.

China’s data overnight caught recent attention as “China grew at its slowest rate since 1990“ but the market reaction was hard to register. Anecdotal reports and indications like the massive drop in car sales in Q4 tell a more worrisome story than the official data as China’s economy has clearly stumbled. Many are also rightly question whether any trade deal with the US will offset this slowdown, and the threat of the tariff schedule actually appears to have accelerated demand for Chinese exports ahead of the new calendar year.

The week ahead will be a busy one, with further Brexit drama beginning already today with UK prime minister May to present her Brexit 'Plan B', having so far failed to signal that she is willing to ask for an extension of the March 29 Article 50 deadline. May will supposedly ask for tweaks to the Irish backstop portion of the existing deal rather than agreeing to the seek the European Union trade union deal that Labour opposition wants, a move that would split her own party.

A Bloomberg article provides an excellent rundown of the process from here, especially how Parliament has taken increasing control of the process. Given that the EU has refused to countenance any changes to the originally agreed deal, the options are no-deal and delay, meaning a difficult path for significant further sterling upside immediately unless Parliament’s move is seen as sufficiently forceful to set a path towards a second referendum.

Above all, let’s recall that the default option is a no deal exit if no further measures are taken to avoid that fate. The FT’s Munchau suggests the risk of a no-deal Brexit is than the market appreciates and I largely agree.

Elsewhere this week, the European Central Bank is an event risk worth paying attention to for the first time in a long time as the EU economic outlook has darkened so severely that a more robust response is more likely, at least in the form of further caution on forward guidance and a willingness to reinvoke some form of monetary easing should conditions warrant, even if ECB head Mario Draghi has declared that the EU is not on the path to a recession.

Chart: EURUSD

EURUSD recently rejected the 1.1500 breakout, which was a weak jab inspired by China’s brief but rather forceful strengthening of its currency in the same timeframe. This week’s ECB offers an important test of whether a more explicitly dovish ECB can drive a break below the 1.1300 level and then the actual nominal lows below there, possibly for a go at 1.1000, as EURUSD has an affinity for round numbers.
EURUSD
Source: Saxo Bank
The G-10 rundown

USD – the greenback looking pivotal this week in EURUSD terms over the ECB, elsewhere, more wood to chop to shift the technicals back in the USD’s favour. Shutdown risks haven’t weighed on the Fed outlook yet.

EUR – again, downside risks over the ECB meeting this Thursday. If market in a negative mood, perhaps more risk of EURUSD and especially EURJPY downside, while a more stable risk appetite environment might see EUR bears targeting EURAUD and similar.

JPY – US long yields creeping back higher and strong risk appetite continue to sideline the yen – need both of these to reverse for any upside traction. EURJPY one interesting trade this week, given proximity of important 125.00-50 pivot zone and ECB this Thursday.

GBP – sterling backing down as market second guesses last week’s confidence that we are shifting away from No Deal risks. Two-way risks here on headlines after today’s 'Plan B' outline from Theresa May.

CHF – a bit surprised CHF hasn’t backed up more, given the sterling weakness today, but at the margin, stronger risk appetite and higher yields are possibly driving franc weakness. Note the 1.1350 area on the EURCHF chart.

AUD – weak Chinese growth data fights with strong Asian equity markets and generally complacent risk appetite for attention. AUDUSD keeping its cards close to its vest – completely sideways for seven sessions ahead of this week’s Australia payrolls

CAD – USDCAD is stuck after the recent descent – more upside tactical risks than downside, given that risk appetite and oil have done everything they can to drive further CAD strength.

NZD – short rates have eased lower relative to Australia, but AUDNZD reluctant to make a louder rally statement as we await the key Q4 CPI data from NZ tomorrow evening.

SEK – disappointment for SEK bulls as recent robust risk rally has failed to inspire more SEK strength – a more dovish ECB this week could finally see more downside interest in EURSEK if the general market mood doesn’t sour again.

NOK – Norway’s short end of the yield curve has collapsed in recent months, suggesting little prospect of Norges bank signaling anything dramatic this week, but risky asset stability and firm oil prices could continue to drive EURNOK downside pressures, assuming we also get a solidly dovish shift from the ECB.

Upcoming Economic Calendar Highlights Today (all times GMT)

• US Markets closed today 
• UK Prime Minister May to Present Brexit Plan B

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.