Yesterday, Theresa May made a statement in parliament to lay out the next steps in the Brexit process, following last week’s heavy defeat when politicians voted on the current proposal. Although the clock continues to run down towards the March 29th Brexit deadline, a number of key developments have emerged. One was a commitment by the Prime Minister to be more flexible in her thinking over the Irish border backstop—something which politicians in Europe are starting to admit is carrying a disproportionate amount of influence over the process. Another was parliamentary rivals colluding over amendments which will be tabled ahead of next week’s vote. Although Downing Street is playing down the significance of next Tuesday’s vote, it could push the UK away from a no-deal Brexit, something which would likely serve up a degree of support for the Pound. Ahead of this, Sterling is expected to remain volatile, with the potential for further movement being seen off the back of political developments.
With the World Economic Forum in Davos now underway, a fresh narrative is emerging over the state of the global economy. The International Monetary Fund (IMF) posted its latest global growth projections yesterday, and the message was clear that an economic slowdown is being seen, the China-US trade dispute is contributing to the situation, and factors such as a disorderly Brexit could make the situation even worse. The IMF was reportedly reluctant to offer up any forecasts of UK economic growth on the basis that there are so many Brexit unknowns. Although, the fact the estimate of 1.5% was unchanged from the number released in October offers a glimmer of optimism. However, the message was clear: a disorderly Brexit would be damaging for parties right across Europe. Moreover, the timing could prove instrumental in forcing the hand of the European Union in working proactively with the UK to avoid that worst-case scenario of a no-deal Brexit.
After Friday’s sell-off, the Pound found some support against the US Dollar in the latter part of yesterday’s session as confidence improved that politicians could find a way ahead. However, these gains have proved difficult to sustain overnight, with Sterling retreating as a result. Volatility on all Sterling crosses is set to remain elevated as long as Brexit uncertainty prevails.
The Euro continues to lose ground against the US Dollar, with mounting concern that the European Central Bank (ECB) will be obliged to take a more dovish position at this week’s meeting, eroding sentiment. The prospect of better yields on US Dollar deposits seems set to continue dictating sentiment.
Optimism over a Brexit compromise being struck provided some support for the Pound yesterday, and with the Euro weakening off the back of expectations of a dovish ECB statement on Thursday, this proved sufficient to allow GBP/EUR to consolidate gains overnight. The cross is still below recent highs, but is sitting well above post-Christmas lows.