Brexit compromise inches a little closer

​​​​​​Today's news headlines:

  • 'Sterling slides as MPs reject Brexit alternatives’. The Pound fell after last night’s round of votes, although the very narrow defeat for a soft Brexit involving a customs union with the EU is being taken as a signal that a way ahead may exist. (Financial Times)
  • 'No need for the Fed to enter panic mode and cut rates now, says Moody’s’. The call puts the ratings agency at odds with The White House, where last week advisers suggested an immediate 0.5% rate cut was necessary. With a strong underlying economy, such a move would fuel potential over-leveraging. (CNBC)
  • 'Eurozone factory activity contracts faster in March - PMI’. The possibility of the currency bloc heading into an industrial recession is growing, adding weight to the idea that the European Central Bank has now missed the opportunity to hike interest rates in this economic cycle. (Reuters)

Brexit

Last night, politicians failed once again to agree on a way ahead as the UK attempts to extract itself from the European Union. The fact that a permanent customs union alternative came so close to gaining majority support did appear to draw a line under the Pound, but the currency is slipping again in early trade. Although the default position remains that the UK will crash out of the EU without a deal at the end of next week, there’s a glimmer of optimism that a way ahead can be found. However, this is countered by the fact Theresa May could still call a general election, and the accompanying uncertainty would likely be damaging for the Pound.

Eurozone interest rates

Yesterday’s Eurozone Manufacturing Purchasing Managers’ Index (PMI) reading for March came in below expectations, adding further doubts to the European Central Bank’s (ECB) ability to hike interest rates in the current economic cycle. In addition, more monetary stimulus is expected in the summer, and the Eurozone may now be left to ride out the imminent downturn with record-low interest rates. Downside pressure on the Euro has, however, been relatively measured, so the negative themes may already be close to fully priced in.

GBP/USD

Volatility for the Pound against the US Dollar has once again noticeably increased in recent hours, as uncertainty prevails over the outlook for Brexit. If there are suggestions something like a customs union could provide a workable way ahead, then significant gains could be on the cards for Sterling as a result.

EUR/USD

The Euro moved lower against the US Dollar during Monday’s session with the shortfall in Eurozone PMI and a better-than-expected US ISM Manufacturing reading providing direction. Yesterday it may have looked more like a story of US Dollar strength than Euro weakness, but Monday trading suggests there’s still appetite to push the common currency lower.

GBP/EUR

A modest recovery followed selling after last night’s latest Brexit impasse. Today a potentially volatile cabinet meeting has the potential to deliver something in terms of direction.