Market awaits Brexit breakthrough

​​​​​​Today's news headlines:

  • 'Growth spurt will run out of steam as Brexit clouds gather’. UK growth forecasts are set to be downgraded this week after the effects of pre-Brexit stockpiling, which bolstered the economy through the first quarter of 2019, fade. The ongoing uncertainty continues to hamper business investment plans. (Sunday Times)
  • 'US-China trade talks are in the final laps, Treasury Secretary Mnuchin says’. Talks are set to resume in Beijing tomorrow. The stakes are high the final stages of the negotiation take place; a resolution is urgently needed to help support global growth. (CNBC)

Brexit

The UK Prime Minister remains committed to resolving the Brexit impasse before European Union elections, which are due to be held in three weeks’ time. Anything which removes some of the uncertainty facing British business can only be good news. The risk to the Pound of further delay has been illustrated in last week’s disappointing performance and also in growth forecasts from the influential EY Item Club. Brexit isn’t the only issue facing MP’s; this week’s local elections are likely to be a distraction. The prospect of heavy losses for the Conservative Party could reignite the debate over Theresa May’s leadership role and cause more Pound uncertainty.

US trade talks

Trade talks between Beijing and Washington are running at a slow pace. Messages continue to emerge from the US suggesting progress is being seen, but the DXY Dollar Index remains just short of two-year highs. Arguably, official word of an agreement would be the primary catalyst for Dollar depreciation, not the nitty-gritty details. From both a policy and global growth perspective, a weaker Dollar would be a desirable outcome, so the stakes of continued progress are only escalating. 

GBP/USD

The Pound is recovering from Thursday’s test of 10-week lows against the US Dollar, but there’s little in the way of fundamentals to justify the move. Political risk remains elevated in the UK, suggesting that Sterling could continue to underperform for some time yet.

EUR/USD

The Euro has marginally recovered from lows seen at the end of last week against the US Dollar. Spanish elections passed largely without surprise, so this may be lending some support to the common currency. Questions remain over the outlook for the Eurozone economy, and downside pressure could return to the pair.

GBP/EUR

Sterling has been trading in a relatively narrow channel against the Euro since the second half of last week. The combination of ongoing Brexit inertia plus the prospect of heavy losses for the Conservative party in Thursday’s local elections has the potential to leave the Pound struggling in the near-term.