Pivotal week lies ahead: Emergency EU summit and ECB policy meeting in focus
Today's news headlines:
- 'Push for Brexit deal heats up ahead of EU summit’. The prospect of the UK having to participate in EU elections at the end of May is providing some renewed optimism that a hard Brexit can be avoided, which is lifting the Pound in early trade. (Wall Street Journal)
- 'U.S yield curve flattens as U.S. wage growth cools’. Friday’s sluggish improvement in US pay cheques has served to reduce the likelihood that the Federal Reserve will hike interest rates this year, for fear of stubbing out inflation altogether. (Reuters)
- 'Weakened European banks vulnerable to another credit crunch’. Rising levels of corporate debt and profits curtailed by extended periods of ultra-low interest rates have made for a toxic backdrop in the European banking sector. This could encourage the European Central Bank (ECB) to move faster with stimulus measures. (Daily Telegraph)
As the new week gets underway, the Pound is posting fresh gains as a result of two points of confidence. These are the belief that a cross-party compromise can yield a way forward, and that EU leaders will wave through the latest Brexit extension request at an emergency summit on Wednesday. In this case, the basis for optimism is nebulous and therefore comes with substantial risk; it is safer for markets to expect further volatility for the Pound in the near-term.
Last week, Friday’s Non-Farm Payrolls figure may have impressed, but average hourly wage growth told a different story. This suggests the Federal Reserve needs to take a cautious approach to monetary policy in the months ahead and comes at the same time as fresh criticism from the White House. Donald Trump’s team is demanding aggressive rate cuts to bolster economic growth and the President has been trying to bring his own men onto the central bank’s board, now that Chair Jerome Powell has expressed independent views on policy. This points to a more dovish Fed, and in turn, a weaker Dollar story may unfold in 2019.
The European Central Bank makes its next monetary policy statement on Wednesday. There’s an expectation that this could include news of long-term, low-cost loans to Eurozone banks, which would prove useful in helping bolster profitability, lift their share prices, and help avoid another credit squeeze. There is the potential for weakness in the common currency once details are received, depending on the scale of any initiative.
The Pound is sitting towards the lower end of the six-week trading range against the US Dollar. Any optimism over a cordial solution to Brexit has the potential to drive gains in the short-term.
The Euro continues to trade sideways against the US Dollar, which has been the pattern for almost two weeks now. Wednesday’s ECB policy statement has the potential to initiate a breakout.
The Pound has posted some modest gains from Friday’s lows, but further indications on Brexit deliberations or EU comments before Wednesday’s meeting have the potential to move markets.