Pound supported by fresh Brexit optimism

​​​​​Today's news headlines:

  • 'Pound gains on hints of support for PM May's Brexit deal’. High profile pro-Brexit MPs are now suggesting they may accept the deal that’s on the table amid mounting concern that the whole process could be called off. With a no-deal outcome looking less likely, Sterling is finding support. (Reuters)
  • 'Dollar edges up, Kiwi slides as RBNZ flags possible rate cut’. A rally in US equity markets yesterday helped drive bond yields higher and is delivering gains for the US Dollar as fears of a Federal Reserve rate cut abate. (Reuters)
  • ‘Euro-area banks can expect ECB loan details by June, Rehn says’. Opinions are still divided over the likely duration of the Eurozone economic slowdown, but details on the scale and timing of European Central Bank (ECB) stimulus measures is weighing on the Euro. (Bloomberg)

Brexit

During yesterday’s session, the Pound gained against the Euro amid renewed speculation that a Brexit deal could yet be achieved. Evidence of mounting public opposition to Brexit is exerting pressure on a group of pro-Brexit MPs, who are now indicating that they may be willing to accept the deal as it stands in a bid to ensure the process can be completed. This reduces the risk of a no-deal outcome which is likely to be positive for the Pound. Theresa May’s position looks increasingly untenable, and with the Conservative Party so divided, a general election may be necessary to find a long-term replacement.

US Treasury yields

The US yield curve remains inverted (see yesterday’s report), but the gap is closing. This is pushing back the need for a quick rate cut from the Federal Reserve and also goes some way to explaining the Pound’s underperformance against the US Dollar versus the Euro in recent trade. The gap between the two-year and five-year yield will, however, remain in focus, especially given the quiet US economic calendar in the short-term. Any widening of this spread has the potential to see the Greenback pushed lower.

GBP/USD

The Pound is little changed against the US Dollar with improved sentiment over Brexit being countered by support for the Dollar off the back of rising Treasury yields. Brexit developments will likely remain influential in the short-term.

EUR/USD

Support for the US Dollar and speculation over the extent of ECB stimulus measures served to push the pair to two-week lows. Rising US Treasury yields could see further weakness emerge in the short-term.

GBP/EUR

The pound continues to push to the top of its trading range while the Euro languishes at the bottom of its respective range. Markets will be watching tonight’s voting closely, but there isn’t a strong bias for the event. However, the vote could be a potential catalyst for volatility.