Emergency EU leaders’ summit to set tone for Sterling

Today's news headlines:​​​​​

  • ‘Philip Hammond suggests MPs could revoke Article 50 to prevent no deal sinking the value of pound’. The Chancellor of the Exchequer made the comments during a cabinet exercise mapping out various scenarios, although an extension to Brexit by EU leaders remains more likely. (Daily Telegraph)
  • 'U.S. Dollar edges down as IMF lowers 2019 global growth forecasts’. Lower forecasts for global economic expansion took a toll on the Greenback yesterday and although much of the impact was short lived, this underlines the vulnerability of the currency which is already battling with slower US growth. (Xinhua)
  • ‘ECB under pressure to spell out further stimulus options’. The European Central Bank’s latest monetary policy meeting concludes today.  With the Eurozone economy struggling, failure to address the need for fresh stimulus measures could leave the Euro exposed. (Financial Times)

Brexit

During today’s emergency meeting of EU leaders, Theresa May will request an extension to Article 50, which given the current narrative is likely to be granted. The exact duration of any extension and accompanying conditions will determine the direction of the Pound.  A longer extension is the EU’s preference, because it will end the series of short-term brinksmanship pervading the process in the past months.  Having failed to deliver on her view of Brexit, Prime Minister Theresa May will remain under pressure to stand down quickly and pave the way for a leadership battle.  With no credible majority holder in sight, this opens up a fresh batch of political risk for the UK and the Pound.

Global growth

The International Monetary Fund trimmed global growth forecasts again, as trade tensions continue to weigh on the economic outlook. With Congress struggling to pass a replacement to the North America Free Trade Agreement, negotiators making slow progress with the new US-China trade deal, and the Trump administration threatening substantial tariffs on EU goods, the overall situation is showing few signs of improvement.  Safe haven assets tend to be the primary beneficiary in these circumstances, but rising Oil price pressures have a moderating effect on this dynamic. 

GBP/USD

The Pound is trading largely sideways against the US Dollar right now, with the market awaiting further clarity over Brexit. Yesterday, Phillip Hammond said that a huge amount of downside risk remains on the table in the event of a no-deal Brexit and dramatic options shouldn’t be discounted.

EUR/USD

The Euro has been holding broadly steady against the US Dollar since Monday’s disappointing US economic data. Today’s ECB statement will however have the potential to direct the pair further and if the market sees a failure in addressing the risk of further economic slowdown, the common currency could be under pressure.

GBP/EUR

Again, Brexit is key in determining where the Pound goes next against the Euro. The outcome of today’s EU leaders’ summit will be instrumental in determining where the currency goes next.