FX – Calm Before the Storm?

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Market Drivers November 5, 2018
UK PMI Services Misses
Cable Seesaws on Brexit news
Nikkei -1.55% Dax 0.16%
Oil $62/bbl
Gold $1232/oz.
Bitcoin $6459

Europe and Asia:
GBP UK PMI Services 52.2 vs.53.3

North America:
USD ISM Non-Manufacturing 10:00

The FX markets remained steady but wary at the start of the week as the Brexit negotiations and risk off flows continued to weigh heavy over the majors as the prospect of a final deal eluded negotiators for now.

Positive headlines over the weekend suggested that EU and UK were very close to a final solution on the Brexit deal with key provisions on customs union and financial sector compatibility all but worked out. However, the Irish border issue remained the key barrier separating the two parties.

The EU is insisting on an unconditional backstop that would allow the free movement of all goods across the Irish border while hardliners in PM May’s government including Secretary for Brexit Dominic Raab insisting of some sort of a timeline that would allow UK to opt out of the Irish border agreement. Such a compromise would violate the foundational basis of EU and it very unlikely that Europeans would agree to those terms. That leaves PM May with a take it or leave it proposal for her cabinet which continues to be deeply divided between those that want to create the most benign exit conditions and those who argue for unconditional exit from the European Union.

Tomorrow could prove to be the key day as PM May tries to convince the cabinet to proceed with her deal. If she is unable to reach a consensus the odds of a hard Brexit will rise markedly and cable bulls hopes for a rise through the 1.3200 level will be destroyed.

Meanwhile, the pall of uncertainty is taking its toll on UK business as UK PMI Services printed much lower than expected at 52.2 vs. 53.3. This was the lowest reading since March and points to a paltry 0.2% growth in Q3. For now, the markets continue to ignore economic data as political headlines rule trade, but if hard Brexit becomes a reality every poor economic reading will hammer the pound lower as investors turn increasingly negative on the currency.

In North America today the focus will be on ISM Non-Manufacturing data which is expected to print at 59.3 versus 61.6 the period prior. As long as the data comes within the forecast, the dollar is likely to hold bid on assumption that Fed will maintain its steady tightening policy, but USDJPY also faces risk-off flows especially if US equities resume their downard moves after a slight rebound last week. Stock markets remain jittery as profit growth appears to have peaked while political risks have risen, Tomorrow’s midterm election will dominate trade especially because results appear to be statistical toss up and the final outcome could be a function of turn out.

For now, a wary calm persists in the markets but it can rupture quickly in the next 24 hours.

Boris Schlossberg
Managing Director

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