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The Turkish lira was focusing mind on emerging markets currency trading desks this morning, as the government in Ankara sought to stabilise it ahead of local elections this weekend. Meanwhile GBP traders were keeping a close watch on events in Westminster.

But let’s start with America.

In the US, economic data this week have been broadly disappointing. Housing starts and building permits figures both surprised to the downside, with the former declining 8.7% during February and the latter down 1.6%. The Conference Board Consumer Confidence Index declined from 131.4 in February to 124.1 in March, having been forecast to rise modestly, while fourth quarter GDP growth slowed from an annualised 2.6% previously to 2.2%.

The weakness in economic data and the continued flattening of the US yield curve, as measured by the difference in yield between the 2- and 10-year treasuries, has contributed towards a significant shift in market monetary policy expectations from the Federal Reserve.

The market, based on Fed fund futures, is pricing in a zero probability of the US Fed raising rates this year. The probability of a rate cut by September is now above 50% having been at 0% earlier this month.

Turkish banks hold back lira liquidity

Following instructions from President Erdogan’s government, Turkish banks are withholding the lira’s liquidity from the London market in order to defend the currency until Sunday the 31st of March when local elections will take place.

The Turkish lira plunged by as much as 5% against the dollar this morning. The government had apparently also ordered its banks to keep foreign investors from exiting lira trades, according to reports. So, it is no surprise that the London overnight swap rate rocketed to 1,200% on Wednesday – the highest on record – but is now back towards 50% amid signs that Turkish banks have started providing lira to the market again.

Brexit: can May pull the rabbit out of the hat?

Coming to Brexit and the daily progress report. It was supposed to be Brexit day today. Suffice to say nothing new so far but we will have a vote in parliament today on the withdrawal agreement, but not on the political declaration that sets out the parameters for future UK-EU relations.

“Whilst the vote, if it passes, would satisfy the EU in terms of extending the deadline through May,” says Neil Wilson, Chief Market Analyst at Markets.com. “However, it still does not appear that Mrs May can get enough MPs onside. Can she pull a rabbit out of the hat? We’re either heading to a no-deal exit, or a long delay with a General Election and/or second referendum.”

Sterling has come under pressure again on the doubts, with GBPUSD retreating to below 1.3040 where it had earlier found bid. Wilson thinks a breach below 1.30 would be important and signal the market is starting to really take the prospect of a no-deal exit seriously. Overnight implied volatility is starting to pick up too.

“Whilst we may look to the weakness in sterling vis-a-vis Brexit uncertainty, we must also look at the other half of the trade and stronger dollar,” Wilson added. “Expect further volatility ahead – and a possible crash should Britain leave without a deal.”

EURUSD is on the back foot still – a look beneath 1.12 could herald the last bit of this move lower. There is probably still a touch more ECB dovishness left to price in. Inflation data crossing now won’t offer any succour to the euro bulls.

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Stuart Fieldhouse

Stuart Fieldhouse has spent over 20 years in journalism and financial communications, including six years as a wealth management correspondent for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong.

Stuart has worked as head of content at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Stuart continues to work with hedge funds, private banks, stock exchanges and other financial institutions on their communications, data and marketing requirements.

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