FX Markets Monthly Outlook – January 2019

Countdown to Brexit begins!

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The markets saw a lot of developments from the UK as Brexit dominated the headlines. While there was some optimism about the UK and the EU agreeing to a draft deal, things broke down subsequently.

With the UK parliament already willing to vote down the draft deal, the British PM May called off the much-anticipated vote. This eventually led to the PM’s Conservative party calling for a vote of no-confidence. It was a day of high drama which culminated with PM May managing to win the vote of no-confidence.

Still, EU leaders did not agree on giving the UK any concessions, leaving the Brexit debate in a deadlock. The decision for a parliamentary vote is in January.

Elsewhere, President Trump agreed to a 90-day truce with China on trade tariffs. However, the deadline that is due to expire in March comes only if China can conform to the conditions laid down by the United States administration. But things took a turn closer to the holiday season. The U.S. trade representatives changed the schedule to March 2, 2019.

This is when the U.S. will start to impose a blanket increase in tariffs. There is a 25% tariff hike from 10% for China, which remains in place.

On the economic front, the Fed hiked interest rates by a quarter point in December, while the ECB announced an end to its QE program.

The New Zealand dollar was the top performing currency last month, gaining 5.59% on the month. The Australian dollar followed this. The Canadian dollar and the NOK were the worst performing currencies, losing 0.98% and 1.71% respectively.

usd performance
December 2018 – FX Market Performance

The month ahead: January 2019

January is relatively quiet for most of the global economies. Focus will of course shift to the monetary policy guidance from the Fed and the ECB.

Brexit is also likely to remain in the headlines as the UK mulls over the Brexit deal while the deadline for March 2019 looms closer.

Here’s a quick overview of some of the vital line up of events for the month ahead.

January – A slow start to the new year for monetary policy?

Following the big announcements from the Fed and the European central bank in December, expect to see no significant changes from these central banks. The Fed will be holding its first monetary policy meeting later in January. The ECB will not be holding its monetary policy meeting this month.

Against this context, the Bank of Canada is due to hold its meeting early next week. Investors remain divided on whether the Bank of Canada will start the new year with a rate hike. Recent economic data is somewhat mixed. However, Canada’s labor market continues to indicate that more slack is being absorbed.

The Bank of Canada left interest rates unchanged at its previous meeting but signaled that interest rate hikes would come depending on assessing the incoming data. It is anyone’s guess on whether the BoC will hike rates or remain on the sidelines at this month’s monetary policy meeting.

Brexit will dominate headlines once again

As the deadline for the March 29th Brexit from the EU draws closer and with no deal still in place, the months ahead will bring a lot more uncertainty. The UK parliament is in recess until January 6th, so expect a temporary pause to the Brexit headlines initially.

As the month progresses, the House of Commons schedules to take a vote on the Brexit around January 21. The vote is a legal obligation which cannot be brushed under the carpet.

It will be interesting to see whether PM May will be able to get some concessions from the EU. The Irish back-stop agreement has been the biggest issue, but EU leaders have relented from giving the UK any further concessions.

While the British pound might start the week on a quiet note, expect volatility to rise as a no-Brexit deal or a hard crash out from the EU begins to become a reality.

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