Pound Sterling Could get a Boost vs. Euro, Dollar Monday on Macron Brexit Comments, US Government Shutdown

Above: Emmanuel Macron believes a bespoke trade deal between the UK and EU will exist after Brexit. (C) Pound Sterling Live

Political events over the weekend make for a an interesting start to the coming week in foreign exchange markets.

On margin, events over the weekend suggest the British Pound could be in for a decent start in the coming week.

Markets are closed for the weekend but we have three issues to consider: 1) Emmanuel Macron confirms the prospect of a bespoke Brexit trade deal 2) The US Government has shut down and 3) The SDP vote on whether they should prop up Angela Merkel's leadership.

For reference, the starting points for Sterling will be as follows: Pound-to-Euro exchange rate @ 1.1337 (up 0.76% on a weekly bassis), the Pound-to-Dollar exchange rate is at 1.3860 (up 0.84% on a weekly basis).

1) Macron Gives Thumbs up to Bespoke Trade Deal

On the sidelines of the UK-France Summit French President Emmanuel Macron said in an interview that he does see the UK and EU reaching a bespoke trade deal.

The suggestion - from a key leader in the European Union - adds to the view that the EU could be softening their stance towards the UK ahead of the all-important negotiations on trade.

Macron said the UK could have "deeper relations" with the EU than other countries, as with Norway, but ruled out full single market access as "you decided to leave".

The comments from Macron follow comments from finance ministers from Holland and Spain who last week said they wanted as close-as-possible relationship with the UK following Brexit.

For the Pound, the key question is this - will the UK and EU agree a deal and avoid crashing into WTO rules? If the answer is no then the Pound will be in a great deal of trouble as this is the most disruptive possible outcome.

However, Sterling has risen through late-2017 and early-2018 as signs continue to emerge that both sides are making serious gestures towards the achievement of a deal.

The theme of an appreciating Pound on the back of improving Brexit sentiment could see Sterling advance further in the coming week.

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2) US Government Shutdown

Ahead of the weekend we warned the Dollar remains susceptible to political wrangling in Washington.

And late on Friday the worst-possible outcome concerning US Federal funding was realised - the US government will shutdown as Republicans and Democrats in the senate fail to agree a new round of spending for government services.

This means the government will effectively shutdown for the first time since 2013; all but essential services will be closed.

The Whitehouse and Democratic leaders have been trading accusations as to who is to blame for the shutdown, but what matters for the Dollar is that an agreement is agreed soon.

History shows the Dollar doesn't like shutdowns:

"The last time the U.S. government was officially shut down was in October 2013 for 16 days. The Dollar declined as it has now the month leading up to the shutdown.  Then halfway through, it bottomed out as investors moved on," says Kathy Lien at BK Asset Management.

When Congress passed the Continuing Appropriations Act of 2014 that suspended the debt limit until February, Lien points out the Dollar index actually extended its losses before bottoming a week later.

"A shut down would be bad for sentiment and depending on how long it lasts would potentially hurt US business and consumer confidence and thereby growth. This would in turn further weaken the USD against the EUR, JPY, CHF and GBP," says Manuel Oliveri, FX Strategist with Crédit Agricole.

Importantly, the government shutdown didn't have a major impact on the economy as retail sales or non-farm payrolls rose strongly in the two months that followed.

"So while the dollar should gap lower on Sunday if the government officially shuts down, it will not be a long-term factor that drives the dollar lower," says Lien.

So a short-term boost for the Pound-to-Dollar exchange rate could be on the cards, but longer-term drivers will ultimately hold sway.

3) SDP Vote Could be a Risk to the Euro

For the Euro, near-term risks lies with whether Germany's SDP party will agree to prop up Angela Merkel in a coalition government.

The party votes over the weekend, and if the answer is yes then it's full steam ahead for Europe's largest country.

If its no then elections will likely be called, adding months to uncertainty regarding German leadership.

For now German politics are peripheral to the Euro, but we could see the issue become more prominent in the future should a deal with the SDP unravel.

"We feel that Germany’s political risk remains somewhat under-appreciated in current environment and highlight Sunday’s SPD vote as a potential source of turbulence," says Shaun Osborne, an analyst with Scotiabank.

The youth leader of Germany’s Social Democrats has urged members to reject another coalition with Angela Merkel, warning that it would drive the party to extinction.

Kevin Kühnert, 28, is campaigning against the blueprint for government that 600 Social Democratic Party (SPD) delegates are due to vote on this Sunday.

Commentators say the issue has put the young and radical wings of the SPD at odds with the leadership. If delegates sink the deal, Martin Schulz, the party’s leader, could be forced to resign.

Yet, some commentators reckon the negative impact on the Euro will ultimately be limited.

"Although uncertainties loom large, we continue to expect the party to give its approval. Whether there will be the formation of a grand coalition in the end crucially depends on the precise coalition treaty and the SPD membership vote on it, which will take place after the formal coalition negotiations, probably in the second half of February or at the beginning of March. A rejection by the SPD on Sunday would lead to snap elections, as the conservatives have ruled out the formation of a minority government," says a note on the matter from UniCredit.

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