May Survives, what’s Next?
The pound turns stronger and less volatile. PM Theresa May's government survived a confidence vote yesterday, as widely expected. The latest GBP bounce is emerging after optimistic DUP comments regarding today's talks with May. Consolidation was the theme in the broader market but yen crosses made some headway into Thursday. Euro regains 1.14 , while gold forms a bullish pennant. Yesterday's release of US retail sales did not happen due to the ongoing govt shutdown. We turn to the Philly Fed survey, expected at 9.5 from 9.4 (currently the weakest since Aug 2016). Yesterday's two Premium trades have been filled and are in progress.
The confidence vote in UK parliament unfolded as expected with Conservatives and the DUP falling into line to maintain a majority in a 325-306 vote. Unlike a day earlier, there was no drama in the market before or after the voting.
Cable attempts to break the 1.2940/60 resistance after holding firm above 1.2830s. GBP/JPY recouped the entire flash-crash drop and rose to the highest levels of the year on Wednesday as the yen sold off. Risk trades have had an impressive bounce but risks loom.
On Monday, China will release retail sales, industrial production and GDP data. It's also a US holiday. Ahead of the weekend, investors may look to pare risk and that could lead to some late-week selling, something that could reverse some of the recent gains in risk trades, including GBP/JPY. China nervousness also helps explain Aussie reluctance to break above 0.7250.
Back to Customs Union & BackstopBack to the UK. Several reports have pointed to the EU preparing for an Article 50 extension. Talk about another election remains the recurring call from Labour, but markets are focusing on how the Backstop issue will be reconciled between the DUP and the EU. Also keep an eye on a potential change of tone regarding the Customs Union from May. As long as there are realistic chances of extending Article 50 and/or striking some sort of Customs Union, GBP will remain firm.
The deadline for action is likely Feb 4, which would be the final day to call a general election and have it ahead of the March 29 Brexit deadline. Otherwise May could push Labour and hard-Brexit members of the Conservative party into a game of chicken against a hard Brexit. They could respond with attempts to strip the PM of the opportunity for a no-deal Brexit. In short, the UK remains deep in a quagmire but a signs of an extension in Article 50 or cooperation with Labour could give the pound a powerful boost.
|Retail Sales (m/m)|
|-0.8%||1.4%||Jan 18 9:30|
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