Brexit, ECB top this week's agenda

US president Donald Trump’s “major speech” at the weekend was a thinly veiled attempt to shift blame for the government shutdown to the Democrats as he put on a show of wanting to make a deal  without offering anything of substance. Consult the Twitterverse for all manner of sarcastic breakdowns of Trump’s approach to the situation, including those from @natesilver538. Regardless, the US shutdown is entering unprecedented territory already last week but still not getting much traction in the market – certainly relative to the 2013 shutdown, which more importantly coincided with the Federal Reserve’s starting point its slow shift to normalising policy.

China’s data overnight caught recent attention as “China grew at its slowest rate since 1990“ but the market reaction was hard to register. Anecdotal reports and indications like the massive drop in car sales in Q4 tell a more worrisome story than the official data as China’s economy has clearly stumbled. Many are also rightly question whether any trade deal with the US will offset this slowdown, and the threat of the tariff schedule actually appears to have accelerated demand for Chinese exports ahead of the new calendar year.

The week ahead will be a busy one, with further Brexit drama beginning already today with UK prime minister May to present her Brexit 'Plan B', having so far failed to signal that she is willing to ask for an extension of the March 29 Article 50 deadline. May will supposedly ask for tweaks to the Irish backstop portion of the existing deal rather than agreeing to the seek the European Union trade union deal that Labour opposition wants, a move that would split her own party.

A Bloomberg article provides an excellent rundown of the process from here, especially how Parliament has taken increasing control of the process. Given that the EU has refused to countenance any changes to the originally agreed deal, the options are no-deal and delay, meaning a difficult path for significant further sterling upside immediately unless Parliament’s move is seen as sufficiently forceful to set a path towards a second referendum.

Above all, let’s recall that the default option is a no deal exit if no further measures are taken to avoid that fate. The FT’s Munchau suggests the risk of a no-deal Brexit is than the market appreciates and I largely agree.

Elsewhere this week, the European Central Bank is an event risk worth paying attention to for the first time in a long time as the EU economic outlook has darkened so severely that a more robust response is more likely, at least in the form of further caution on forward guidance and a willingness to reinvoke some form of monetary easing should conditions warrant, even if ECB head Mario Draghi has declared that the EU is not on the path to a recession.

Chart: EURUSD

EURUSD recently rejected the 1.1500 breakout, which was a weak jab inspired by China’s brief but rather forceful strengthening of its currency in the same timeframe. This week’s ECB offers an important test of whether a more explicitly dovish ECB can drive a break below the 1.1300 level and then the actual nominal lows below there, possibly for a go at 1.1000, as EURUSD has an affinity for round numbers.