Brexit extension more likely, but at a price

​​​​​​Today's news headlines:

  • 'EU draws closer to deal on Brexit delay as core leaders plan to meet’. The prospect of the UK crashing out of the European Union on Friday night seems to be diminishing, which has the potential to support the Pound. However, this comes at the cost of participation in the European Parliament elections, which will do little to garner support for Theresa May among Brexiteers. (Bloomberg)
  • 'Dollar dips as crude oil surge supports commodity currencies’. Conflict in Libya, OPEC cuts and US sanctions are combining to drive oil prices higher, while US economic data continues to underwhelm. The result has left the Greenback under pressure, with the DXY Dollar Index posting its biggest one-day fall in almost three weeks. (Reuters)

Brexit

Ahead of tomorrow’s emergency EU leaders’ summit, Theresa May is preparing to hold last-minute talks with Angela Merkel and Emmanuel Macron. Their support for a further Brexit delay looks likely, although it will come at the cost of participation in the MEP elections next month and the demand that the UK acts in a supportive manner towards the EU’s wider agenda. While this stability should be good for the Pound in the short-term, the failure to deliver Brexit is doing little to placate hard-line Conservative Brexiteers. The accompanying increase in domestic political risk, as opponents seek to unseat the Prime Minister, has the potential to cap gains for Sterling.

Dollar Index

A perfect storm is beginning to build against the US Dollar with sharply rising oil prices favouring commodity currencies such as the Canadian and Australian Dollar. Softer-than-expected economic data from Washington is further exaggerating these moves, with yesterday’s Durable Goods Orders print adding to Friday’s disappointment from the sluggish wage growth. Overall, this is building a story of broad-based US Dollar weakness with the Pound and Euro benefitting. With the DXY Dollar Index still sitting close to ten-month highs, there’s plenty of scope for further Greenback weakness to emerge.

GBP/USD

A combination of US Dollar weakness and optimism that a no-deal Brexit can be avoided has helped Cable add around half a cent overnight. The potential for further disappointing US economic data with a contraction in the JOLT job openings reading later could deliver more upside for Sterling.

EUR/USD

Yesterday, the Euro moved higher against the US Dollar based on a shortfall in Durable Goods Orders providing some meaningful gains. With a quiet Eurozone economic calendar and the scope for fresh disappointment from the US, the upward trajectory could still be maintained in the short-term.

GBP/EUR

Fresh Brexit optimism has been delivering gains for the Pound against the Euro since yesterday afternoon, although the cross will be exceptionally vulnerable to any suggestions from EU leaders that the extension to Article 50 won’t be granted. Such indications could result in heightened volatility in the short-term, although stability may emerge later in the week.