FX Markets Await Key Brexit Vote; DXY Index Rallies, GBP Stalls

The US Dollar (via the DXY Index) has returned back to the topside on Tuesday amid a downdraft of weakness in the European currencies. The Euro, hit by concerns that it’s largest economy is inching towards a recession, is the big mover on the day. The German economy posted its weakest rate of growth in five years in 2018, underscoring what has been a steady erosion in the fundamentals supporting the Euro in recent weeks.

As the largest component of the DXY Index at 57.6%, any potential breakdown of the US Dollar gauge needs Euro participation – otherwise, follow-through won’t occur. This week, the only significant Eurozone economic data release is the December CPI report to be released on Thursday, due to show more signs of disinflation. Ultimately, the combination of weaker than expected growth from Germany plus slowing price pressures could pave the way for a dovish European Central Bank at its rate decision on January 24.

KEY BREXIT VOTE TODAY – DOOMED FROM THE START?

Attention is quickly shifting across the continent from Berlin to London where the British Pound is in the spotlight ahead of the UK parliament’s vote on UK PM Theresa May’s EU-UK Brexit deal later today. Whereas concerns over a failed vote in December 2018 triggered weakness in the British Pound, the past two weeks have seen rallies in the GBP-complex on the back of hope that the vote won’t pass. Rather, the projected failed vote may not be a sign that the UK is careening towards a no-deal ‘hard Brexit’ outcome, but rather that Brexit could potentially be avoided altogether.

Assuming UK PM May’s deal doesn’t pass today, then the next 24-hours for the British Pound could be rocky (even if options markets say otherwise; implied volatility is low). Depending upon the scale of the defeat, May could step down as prime minister. Or, if she doesn’t abdicate, the Labour party could call a ‘no confidence vote’ in an effort to trigger a general election. Would that mean Labour party leader Jeremy Corbyn is the next prime minister? Not necessarily: Labour trails the Tory party by 6% in the latest polls.

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