Pound eyes one-month highs against Euro as Brexit optimism rises

Today's news headlines:

  • ‘May to face cabinet after Varadkar stands firm on Brexit backstop’. Taoiseach’s position could mean the UK is tied to the EU customs union in long-term. (The Guardian)
  • ‘RBA holds cash rate steady at 1.5%’. Australian economic growth is revised upwards. (Financial Times)
  • ‘Dollar treads water ahead of US midterm elections, RBA holds steady’. Investors are putting discretion before valour as they count down to the U.S. midterm vote. (CNBC)

Economic data out of the UK yesterday may have been far from impressive with the Purchasing Managers’ Indexes (PMI) coming in short of expectations, but Sterling remains upbeat with optimism growing ahead of today’s key government cabinet meeting over Brexit. Sentiment has propelled the Pound back to one-month highs against the Euro, although it’s evident with the messages coming out of Dublin, reaching an accord on the terms of the split is still going to be a hugely complex process. With the Irish Taoiseach pushing back against the proposed border backstop plan, the challenge of getting a majority of politicians in the UK plus all 27 remaining members of the European Union on board still looks like it could be a long haul, and questions will be asked over whether the current bout of optimism is misplaced.

It’s a generally light day in terms of economic data today, but arguably the biggest story is set to be the midterm elections which will be acting as a referendum on Donald Trump’s first two years in office. Expectations are for record high levels of voter turnout, and the race seems too close to call. If we do see the opposition Democrats win at least one of the congressional chambers, then the accompanying uncertainty for US policy—and the increased prospect of Donald Trump being impeached—is seen as a likely negative for the US Dollar. Political uncertainty risks stemming the recent tide of capital flow into the US, demand for the currency drops and with it so does the price. With that in mind, a clean sweep for the Republicans may well see the Dollar bounce tomorrow.

In the UK, today sees a key meeting of cabinet ministers over Brexit. Progress here will be crucial as the next EU summit on Brexit is scheduled for November 17th and 18th. With growing push-back from Dublin, failure for the British government to be able to show a degree of unity at this stage will lay bare the fact that a no-deal outcome may end up being delivered on the basis of the remaining EU member states simply not accepting the tabled proposals. Not only would this be damaging for Sterling in the short-term, but it could well serve to hamper trade relationships for some years to come too.

The Eurozone Services PMI is set to be released at 9am GMT and expectations are for the figure to hold steady at 53.3. While no change is unlikely to rock the common currency, the risk is to the downside as the print isn’t that far away from the break-even reading of 50.0. If the index does tail off, there’s a real risk that this could add to downside pressure on the common currency. Otherwise, the focus for the Euro will likely shift to readings such as tomorrow’s Eurozone Retail Sales figures which are tipped to show a notable decline.

GBP/USD

After yesterday’s volatile start, the Pound has resumed its march higher. While the outcome of the UK government cabinet meeting is likely going to play a role in the next direction, it could well be the result of the US midterms that carries more weight in the near-term.

EUR/USD

The Euro has bounced off last week’s lows, although progress beyond here has been sluggish. Again, the US elections will play a pivotal role in where the currency goes next, although with the common currency still holding close to recent lows, downside risk may be limited.

GBP/EUR

The GBP/EUR cross has gained almost three cents since last week’s lows, with positive sentiment over Brexit being the key driver. Any fractures emerging from today’s cabinet meeting could easily see some big moves lower for the pair as a result.