Optimism over Brexit resolution may be overstated

Today's news headlines:

  • 'Markets still aren't pricing in a hard Brexit, ECB's Knot says’. Although Parliament’s intervention in Brexit has boosted the prospect of avoiding a no-deal departure, there’s still concern that the Pound is pricing in the positive scenarios without fully accounting for the risks. (Bloomberg)
  • 'Global recession fears are overblown, even as growth will stay sluggish in 2019’. A risk-aversion stance by many investors has bolstered the US Dollar, but suggestions are that this may be misplaced, and the global economy can avoid a slowdown. (CNBC)

Brexit

Despite rising divisions in Theresa May’s cabinet and the ongoing speculation over the Prime Minister’s future, the Pound hasn’t truly collapsed, at least not yet. The currency remains the best performing of the G10 for the year to date, and although GBP/USD slumped to a three-week low in the wake of Friday’s defeat, support is creeping back in again. This has caused some concern that the worst-case scenarios aren’t being adequately priced in. There may be little desire for a no-deal Brexit, and the focus may be turning towards a slower withdrawal, but crashing out remains an entirely possible outcome before the end of next week. In addition, Theresa May also hinted on Friday that a general election might be necessary to break the impasse. This would bring with it a whole new set of risks which haven’t yet been priced into markets.

Global growth

The US Dollar has been finding favour across the board over the last week and a half, amid fears of a global economic slowdown. However, there are suggestions that the debate here may have been overblown, and although 2019 will be far from a vintage year for economic growth, momentum will start to pick up in the second half. Further evidence of this has the potential to erode some confidence in the Greenback. The currency still looks well placed in terms of offering an attractive yield in the medium-term, but further broad-based gains from here may be difficult to justify.

GBP/USD

The Pound traded down to lows not seen for almost three weeks against the US Dollar on Friday, but the pair has rebounded and gained most of a cent. Given the extent of uncertainty over both Brexit and Theresa May’s future, expect the pair to remain very volatile in the days ahead.

EUR/USD

The Euro has been rangebound against the US Dollar since the end of last week. Key Purchasing Manager Indexes (PMI) in the coming days may provide more clarity over the extent of any slowdown in the Eurozone economy. If there’s cause for optimism, then the pair may have scope for gains from here.

GBP/EUR

The Pound has rallied off Friday’s lows against the Euro, but again this cross will remain vulnerable both to domestic political developments and also to any hint of progress over Brexit. Direction is difficult to call, but heightened volatility in the days ahead seems inevitable.