Yesterday, the UK House of Lords dealt a blow to Theresa May’s Brexit plans. The Lords voted for an amendment to the Brexit bill that will guarantee Parliament a "meaningful vote" on the final exit deal May negotiates with Brussels. This amendment essentially gives lawmakers a veto over the final deal, and allows them the option to send the government back to the negotiating table in case they are not satisfied with the deal it agrees with its EU counterparts. May had already pledged to give Parliament a vote on the final deal, but it would only be a "take it or leave it" vote, implying that in case lawmakers said no, the UK would walk away without a deal.
Even though this is a "soft Brexit" signal, as it would restrict May’s ability to actually follow through with her "hard Brexit" plans, GBP was little changed on the news. We believe that this is mainly due to the fact that this amendment must also be approved by the House of Commons. The government has already confirmed that it will fight these changes in the lower house and seek to overturn them. We think that there is a high possibility of that happening given that the Commons have already shown they do not intend to interfere with the government’s plans, by voting for the bill the first time without any material amendments.
Focus now turns to Chancellor Hammond, who will deliver his Spring Budget to Parliament today. Following his comments on Sunday that it is sensible to maintain fiscal discipline in order to ensure the UK can weather economic surprises, we expect a less expansionary budget than previously. We believe that signs of some fiscal tightening could bring the pound under renewed selling interest, bearing in mind that a reduction in government spending could weigh on the nation’s GDP.
GBP/JPY traded lower yesterday and during the Asian morning today, it managed to touch its toe below the support (now turned into resistance) barrier of 138.80 (R1). Given that the rate is trading below the downtrend line taken from the peak of the 15th of December and also below the prior upside support line drawn from the low of the 16th of January, we believe that the near-term outlook remains negative. Therefore, we would expect the dip below 138.80 (R1) to carry extensions towards our next support hurdle of 137.90 (S1). Switching to the daily chart, we believe that the broader outlook is cautiously bearish as well. However, a clear close below 137.00 (S2) is needed to signal that the bigger downtrend is back in force.
As for the rest of today’s highlights: During the European day, we have a very light data calendar, with no major indicators due to be released.
In the US, the ADP employment report for February is due out. The private sector is expected to have added 190k jobs, less than the robust 246k in January, but still a solid number that could raise speculation for the NFP figure to meet its forecast of 190k as well and thereby, support the dollar. EUR/USD moved somewhat lower yesterday, falling just below the support (now turned into resistance) level of 1.0570 (R1). A strong ADP report could add some more fuel to the pair’s decline and is possible to pave the way for another test near the psychological zone of 1.0500 (S1). Looking ahead, we think that following the new administration’s freeze on public sector hiring in late January, we are likely to see the ADP print coming in closer to the NFP number, considering that the NFP figure will now include fewer public employees, which are not measured in the ADP report. We also get the nation’s final labor cost index for Q4.
From Canada, we get housing starts for February and building permits for January. Housing starts are expected to have rebounded, but building permits are expected to have slowed somewhat. Given the mixed expectations, the reaction in CAD could remain relatively limited.
Besides UK Chancellor Hammond, we do not have any other speakers scheduled for today.
GBP/JPY
Support: 137.90 (S1), 137.00 (S2), 136.50 (S3)
Resistance: 138.80 (R1), 139.70 (R2), 140.70 (R3)
EUR/USD
Support: 1.0500 (S1), 1.0450 (S2), 1.0390 (S3)
Resistance: 1.0570 (R1), 1.0630 (R2), 1.0500 (R3)
