Brexit extension provides limited support for the Pound

​​​​​​Today's news headlines:

  • 'Fed minutes cap Dollar, Pound steady after Brexit extension’. A dovish outlook from the Federal Reserve meeting minutes has left the US Dollar holding near recent lows, while a flexible extension for Brexit until the end of October provides a degree of confidence for Sterling. (Reuters)
  • 'ECB keeps interest rates on hold amid caution on data’. There was little change in the narrative from last month’s European Central Bank (ECB) policy meeting. However, growth forecasts for the year have been downgraded, but Mario Draghi believes that the probability of a recession remains low. (The Times)

Brexit

Yesterday’s congested economic and political calendar was dominated by the latest chapter in the Brexit saga. EU leaders agreed to give the UK a flexible extension of up to a further five and a half months to get the deal ratified by parliament. Theresa May must now explain why she hasn’t been able to secure Brexit. If the Prime Minister steps down, finding a replacement who can garner a majority in the House of Commons remains a big ask. The threat of a general election could prove unsettling for Sterling.

Eurozone growth

Yesterday, the European Central Bank’s policy meeting revealed little new information. Growth forecasts for the Eurozone have been trimmed; the ECB’s estimates for 2019 are now looking even more conservative than the International Monetary Fund’s (IMF) recent revision. There’s optimism that wage growth can offer some salvation, but this remains an evolving situation. The anticipated clarity of the bank lending facilities to support faltering EU banks was not discussed, leaving speculation in the breach. The Euro consequently remains vulnerable to economic data releases which have been disappointing in the core economies, potentially capping upside for the common currency.

GBP/USD

There was a modest uptick in volatility for the Pound against the US Dollar yesterday ahead of the EU leaders’ summit. The market had already priced in an extension, so there was little overall change for the pair on the day. Any developments regarding UK political risk such as a move towards a general election could provide further direction.

EUR/USD

The EUR was sold during the Mario Draghi press conference and has opened higher this morning, but this is largely due to a continued pullback in the Dollar and rise in oil prices.  There is little EU economic data for the remainder of the week so US price dynamics will most likely drive the pair.

GBP/EUR

The Pound has been trading sideways against the Euro since the start of the week, and there’s little sign of any change here. The Pound is still vulnerable to Brexit news flow as the issue remains in the background… Albeit with less intensity.