Brexit Quagmire Continues as Fed to Hit the Brakes

The US dollar is higher across the board versus major pairs on Tuesday. The biggest event was the Brexit vote in the UK parliament. A very mixed bag as a no-deal exit was almost guaranteed, but how to achieve an actual deal is looking murky. The amendments that were approved in narrow victories are against a hard Irish border and a parliamentary vote that blocks a no-deal exit. Voted down was an amendment seeking to extend the article 50 timeline to the end of the year. The EU has already said that the backstop and the deal will note renegotiated, but ready to consider a Brexit delay.

The first Federal Open Market Committee (FOMC) meeting of the year starts on Tuesday and wraps up on Wednesday, January 30 at 2pm EST. Chair Jerome Powell will host a press conference at 2:30 pm EST which will be the highlight as he is expected to give far more details on how what the next move is for the Fed.

Pound Falls After PM May Sent to Renegotiate Brexit Agreement

The pound lost 1.02 percent in the last two days. The outcome of the Brexit vote in parliament once again sends Prime Minister Theresa May to Brussels to seek a new agreement. The European Union was quick to issue a statement after the vote that the agreement already on the table is final, but is willing to extend the deadline.

While the no-deal exit was rejected, the amendments that would have locked down plans to avoid a hard exit were voted down. The divorce between the United Kingdom and the European Union remains a messy affair with lots of talk and negotiation but very little to show for it. The fast approaching deadline and the major issues still to be ironed out will cause the currency market to have increased volatility.

Dollar Awaits Fed Chair Words More than Statement

The EUR/USD rose 0.04 percent on Tuesday. The single currency is slightly higher against the USD after the Brexit vote boosted the euro, but uncertainty remains on how it will all play out with a a new round of unwanted negotiations almost immediately rejected by the EU. The U.S. Federal Reserve will publish its FOMC statement on Wednesday with the market focusing on Chair Powell and his press conference.

This is the first press conference of the year, and the first in the new era of transparency. Powell will now face questions from the financial press after every meeting, instead of the four from his predecessors. This will be a test if Jay Powell continues his straight shooting answers as the Fed is ready to pump the brakes or if he conforms to a more obtuse communication style favoured by policy makers.

The CME FedWatch tool shows the market is forecasting a 100 percent probability that the Fed funds rate remains unchanged at 225–250 basis points range. The currency rose last year as geopolitical factors and the support of the central bank’s efforts to normalize interest rates.

The Fed had tightened monetary policy by raising rates, but also by unwinding the massive balance sheet it had accumulated as part of its quantitative easing program. Friday’s report in the WSJ about a possible end or long-term pause to the balance sheet reduction was a positive for the stock market, but a negative to the US dollar.

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza