With just one week to go until the UK risks crashing out of the European Union for a second time, Donald Tusk is reported to be suggesting a flexible one-year delay to allow the UK Parliament to agree on the terms of departure. Such a move acknowledges the fact that existing differences are unlikely to be resolved in a matter of days. There are also suggestions that a second referendum could now be seen, which may be sufficient to pass the EU’s test of a plan for progress, and the Pound is finding modest support as a result. However, under the long-delay scenario, the ultimate outcome remains unknown, which means the prospect of a return to economic expansion will also remain elusive.
Last night, hopes that the US-China trade negotiations could be concluded this week were dampened. When combined with strong US economic data prints this week, the rationale for sustained Dollar strength remains intact. Last week’s inverted yield curve—a sign of recession which had prompted rate drop forecasts from quite a few analysts—seem less portent of ill times, and more a technical Treasury market dynamic. Any way you dice it, the Dollar is king, for the moment.
The Pound posted its biggest one day fall against the US Dollar in three weeks yesterday, following objections in the House of Lords over MPs demands to delay Brexit. However, the prospect of a flexible extension from the EU has helped recover some of these losses. The market is likely to remain volatile ahead of the emergency EU summit on April 10th.
The Euro has traded in a relatively narrow range against the US Dollar all week. The debate about future Federal Reserve policy action remains open, although next week’s European Central Bank (ECB) monetary policy meeting could provide some fresh direction.
Despite some meaningful losses yesterday, the Pound is well positioned towards the top of the two-year trading range against the Euro. Sterling remains vulnerable to the political news flow and also the diminishing risk of no-deal Brexit next week.