IFX Market Report: Friday 31st January 2020

After over 3 and a half years of uncertainty and hours and hours of tense negotiations since the 2016 EU referendum, the United Kingdom is set to leave the European Union at 11.00pm this evening.

The UK will enter an 11-month transition period which will finish on December 31st during which teams in both London and Brussels will attempt to thrash out an agreement on how trade will look between the UK and EU as we move into 2021.

During the transition period the UK will still have to abide by UK rules but will not have any representation by UK MEP’s and Prime Minister Boris Johnson will not attend any EU summits.

The Bank of England kept interest rates on hold yesterday at 0.75% at their monetary policy meeting. Financial markets had given a 50% chance of a 25bps rate cut, but a boost in the economy following the December general election meant MPC members were more hawkish than expected which resulted in a spike in the pound.

GBPUSD slipped to a low of 1.2981 in the morning but following the BoE’s decision and Mark Carney’s press conference the pair climbed rapidly, hitting a near 1-week high of 1.3110.

Likewise, GBPEUR slipped a little early in the session touching a 1-week low of 1.1784 but rose in the afternoon to a 3-day high of 1.1886.

The World Health Organisation said yesterday the Coronavirus outbreak was a global emergency but helped to calm markets by saying they were against travel restrictions because China’s actions should ‘reverse the tide’ of the spread.

The tone of the WHO’s announcement prompted investors to stop flocking to less risky assets, such as the perceived safe haven currencies Japanese yen and Swiss franc which both fell slightly overnight.

However, despite the WHO’s assurances and recommendations not to impose trade restrictions on China, currencies which are sensitive to the Chinese economy such as the Australian and New Zealand fell to multi-month lows.

Figures released yesterday showed the US economy grew 2.1% in the fourth quarter amid a slowdown in business investment and the ongoing trade dispute with China. The increased trade tariffs on Chinese imports did however help to reduce the US’s overall trade deficit.

EURUSD ticked up slowly yesterday slowly from a low of 1.1007 as markets opened to a high of 1.1038 just after close. EURUSD has remained in the 1.10 -1.11 range for the last 10 days but month-end rebalancing today or a big risk-on move over the weekend may be enough for a break higher or lower.

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