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All eyes on the central banks

Pound makes gains on Brexit news while other developments take the spotlight

The pound had another good day yesterday; rumours that a cross-party agreement had been reached on Brexit sparked hopes that there may be an end to the current uncertainty. The Labour Party has stated it will push for a second referendum if the amended deal is rejected again by parliament – unless a general election is called. This means that while the agreement is good news, there may be choppier seas ahead.

For once, Brexit wasn’t the biggest political drama in the UK. Former Defence Secretary Gavin Williamson was sacked, and a former Labour MP was ousted under the new recall rules and all on the eve of the local elections. While the local elections themselves have no significant implication on the national political picture, any major swing towards particular parties may provide an indication of the mood of the nation. This may be particularly important if Labour chooses to force a General Election if the Brexit deal fails to pass. Investors will be looking today to the Bank of England for the latest announcement of the Monetary Policy Committee. A rate rise isn’t expected despite inflation creeping closer to the 2% target, but the results and supporting commentary could have an impact on the market’s view of recent Brexit developments and whether there is an end to the uncertainty in sight.

US Federal Reserve holds interest rates

President Trump’s wish for a cut in interest rates was not granted by the Fed this month after the interest rate was held in the 2.25% - 2.5% range. Despite the president’s calls on Twitter, Chairman Jerome Powell said that the comments were not discussed in the meeting because the organisation does not sway to political pressure and looks only at the available data. The central bank noted that growth was continuing at a “solid rate”. US GDP grew at 3.2% in the first three months of the year, which was stronger than expected. The US dollar made gains against sterling and the euro in the wake of the decision, but both soon recovered after reflection on the bigger picture. In recent months, the president has attempted to nominate allies to his cause to the Federal Reserve board but with little success; the first withdrew after allegations of sexual harassment emerged and the second was found to owe $75,000 in taxes and held in contempt for failing to pay his ex-wife $300, 000. 

The US dollar wasn’t just contending with the latest rate decision. On Wednesday, US Attorney General William Barr was grilled in the Senate about the Russia enquiry and has refused to testify to the Democratic-led House Judiciary Committee on his handling of the Russia inquiry. The Russia investigation was meant to put the issue to bed, one way or the other, but so far seems to be causing further discord. Special Counsel Robert Mueller who led the investigation has expressed his frustration over the report summary and there may be more explosive revelations to come if Congress gets its wish to review the un-redacted report and accompanying files. Despite the positive economic figures, there are growing concerns that major changes may be on the horizon and those outside the Trump camp believe the Fed is right to remain cautious about enacting any change before this current investigation has played out. 

Reasons to be cheerful

Much of Europe was celebrating May Day – or Labour Day – and there was little news from the continent as a result. While the euro has been having a tough time of late, there was something to celebrate. Italy has edged out of recession, economic growth for the first quarter came in stronger than expected, and there was a fall in unemployment. While the euro has been having a tough time keeping up with the pack of late, with the European Central Bank remaining cautious over the slow-down, these signs will be welcomed by those looking for a positive change. The reason for the caution may be the weaker than expected Chinese data, which suggested the impact of the ongoing trade war with the US. Stocks for Europe’s basic resources, which have a heavy exposure to China, struggled with the news and this may signal a knock-on effect that tempers the current optimism over positive developments in Europe.

Meanwhile, in Canada, while there wasn’t officially a May Day break, there was reason to celebrate after the Bank of Canada’s Stephen Poloz struck a more optimistic tone after prolonged pessimism and declining numbers putting pressure on the Loonie. While the currency lost ground in April for the third consecutive month, the Canadian dollar did climb against a weaker US dollar earlier in the week, boosted by the comments from the BoC’s Governor that there were signs of a more positive second half of 2019 to come, as well as higher oil prices. 

GBP: Pound makes gains on positive Brexit news

GBP: Pound makes gains on positive Brexit news

USD: Dollar loses out as Fed fails to grant the President’s wish

USD: Dollar loses out as Fed fails to grant the President’s wish

EUR: Euro makes gains as Italy edges out of recession

EUR: Euro makes gains as Italy edges out of recession

CAD: Loonie benefits from increased oil prices

CAD: Loonie benefits from increased oil prices

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