Yesterday, developments in Brexit planning—namely the withdrawal of the Malthouse compromise as a potential solution to the Irish border backstop—was sufficient to deliver some meaningful gains for the Pound.
The subject will remain in focus today as Theresa May returns to Brussels. Senior European politicians may at least publicly be downbeat on the outlook, but news reports suggest an alternative legal text is being worked on for the Irish border issue and this could be ready as soon as tomorrow.
That’s vital if the Prime Minister is to be able to see another meaningful vote take place before the February 27th deadline, at which point she stands to lose control of the Brexit process altogether. The chances of a no-deal Brexit may be evaporating, but this still has the potential to weigh on the Pound.
Meeting minutes from the Federal Reserve will be released later today and are expected to stress that the US central bank will continue to take a patient tone over the timing of further monetary policy adjustments. Markets have already been pricing in a dovish bias here which has been responsible for some US Dollar weakness in recent hours.
Further indications in the minutes as to how the Federal Reserve will manage its own balance sheet of debt could also provide some fresh direction for the US Dollar. Unwinding these debts acquired in the wake of the financial crisis a decade ago has been driving up Treasury yields, in turn, inflating the Dollar. Any word of an abrupt end to this process could heap downside pressure onto the Greenback.
News that the Malthouse compromise had been abandoned was sufficient to see the Pound post its biggest one day gain over the US Dollar in almost four months yesterday. The pair remains well below last month’s highs, but this underlines the significance of Brexit progress in terms of supporting the currency.
Brexit stands to damage both the Eurozone as well as the UK, so yesterday’s signs of progress combined with a generally dovish outlook for US interest rate policy was sufficient to drive the Euro higher against the US Dollar. However, with the European Central Bank (ECB) continuing to look at fresh stimulus measures, any gains could be short-lived.
Again, Brexit optimism helped push the Pound to its highest level against the Euro this month. Signs of progress from Brussels today could prove sufficient to deliver further gains in the short-term, especially given the headwinds being faced by the Eurozone.