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.
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.
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.
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.
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.