Brexit remains in spotlight as countdown continues

Today's news headlines:

‘Brexit talks in endgame, says Theresa May’ The main sticking point is how to keep trade flowing at the Irish border. (BBC News)
‘Asian shares falter, Dollar at 16-month peak on Europe, Brexit woes’ Dollar hits a 16-month peak on safe haven bets amid political risks in Europe and acrimonious Sino-U.S. trade relations. (Reuters)
‘Italy, Brexit worries drag European currencies as Dollar rallies to roughly 1 ½-year high’ Euro touches lowest since summer 2017. (Marketwatch)

There’s a sense of groundhog day in the headlines right now, with Brexit very much in focus and the Italian budget question also looming. The combined effect of this uncertainty – plus the prospect of further interest rate hikes from the US Federal Reserve – has been to propel the DXY Dollar index out to fresh 18 month highs, even if the Greenback does look increasingly expensive at these levels. That said, in these uncertain times, it seems likely that the Dollar may well retain its allure, at least until there’s a little more clarity around some of the other key issues.

Word from the European Union’s chief negotiator, Michel Barnier, that the Brexit document could be readied within a matter of hours has helped draw a line under yesterday’s losses for the Pound, although the next key test is set to be the fact that Theresa May’s cabinet is becoming increasingly hostile to the approach being taken. Some newspaper headlines are suggesting the EU is trying to ‘bounce’ the country into a deal, underlining the fact that the outcome is set to be even further away from the picture painted by Brexiteers three years ago. Failure for the Prime Minister to play this correctly could yet again place a leadership challenge back on the table and the accompanying uncertainty here would without doubt hammer Sterling across the board.

Today’s deadline for Brussels to respond to Rome over its deficit-busting budget proposals has the potential to deliver some marked volatility for the common currency. There’s a classic stand-off emerging here with neither side able to give ground without losing face. However, given the Brexit turmoil, the EU presumably won’t want to contend seeing another big economy walking away. Signs of compromise may prove to be positive for the Euro in the short term, but would inevitably open up questions over where this leaves fiscal policy and how it may exacerbate the risk of another Eurozone debt crisis in the years to come.

After a quiet start to the week, economic data picks up somewhat today. At 9.30am GMT, UK Unemployment and Average Earnings numbers are expected and again this should paint an upbeat picture, fuelled by a shrinking labour pool. Clearly that’s not great for productivity if businesses can’t fit the right people to the right job, but the more important number to watch will be the change in wages. Anything much above 3% will raise concerns that the Bank of England will need to act by hiking interest rates to keep inflation in check, something that they will be unwilling to do given the uncertainty surrounding Brexit. A solid number here may however see the Pound jump higher, at least in the short term.

European data picks up today too, with the ZEW Economic Sentiment survey due at 10am GMT. This is a rather blunt assessment of the outlook – the analysts questioned are only allowed to answer as to whether they feel the future is positive, negative or neutral – and the market is braced for a negative number here. Given the pressure the Euro is currently under, the potential for any shock may well be weighted on the upside if we see a print that comes in better than expected.

GBP/USD

Cable bounced off lows for the month during yesterday’s session and optimism over Brexit progress is continuing to lend support here. This however remains a live situation and the mood could quickly change if the proposals appear unacceptable – on either side.

EUR/USD

The pair tested lows not seen since the first half of 2017 during yesterday’s session. The prospect of progress over Brexit pulled the Euro higher, but arguably the bigger question here is what happens with the Italian budget proposal. The wrong call from the European Commission could see the common currency come under some heavy pressure in the short term.

GBP/EUR

There has been very little movement on the pair throughout the Asian session. Both currencies have the potential to see some big moves in the hours ahead, but the market is making no attempt to second-guess the outcome.