Sterling becalmed as markets await next steps in Brexit saga

​​​​​​Today's news headlines:

  • 'Pound rises after Theresa May wins no-confidence vote’. Despite the government having lost Tuesday’s key Brexit vote by a significant margin, parliament continues to support the Prime Minister, giving Sterling a modest nudge higher as the prospect of a general election is pushed back. (CNBC)
  • 'Dollar up on bleak EU outlook, Pound bolstered by hopes of soft Brexit’. Disappointing German Gross Domestic Product (GDP) data from earlier in the week continues to challenge the idea of the European Central Bank (ECB) being able to hike interest rates later in the year. (Reuters)
  • 'CEOs say recession is top worry for 2019’. There’s mounting concern that given threats to global trade and widespread political risk, a slide into recession will be difficult to guard against. (Wall Street Journal)

Last night, Theresa May survived the vote of no confidence in her government as had been expected, but then went on to call for cross-party talks in a bid to resolve the Brexit deadlock. However, the Labour Party has refused to participate unless the threat of a no-deal Brexit is ruled out; although, the prospect of this eventuality now seems vanishingly small, which has offered some support to the Pound. There can be no ignoring the fact that the government remains in a tight spot with little room for manoeuvre, and the opposition seems ready to try and take advantage of this. However, with support remaining resolute in parliament, the prospect of a quick general election also seems to be off the table. Again, this reduction in political uncertainty will help to bolster Sterling.

The outlook for Eurozone economies remains troubled, with Germany having narrowly avoided dipping into recession earlier this week and pressure mounting on the European Central Bank (ECB) to start hiking interest rates before it misses the opportunity. Yesterday saw the ECB caution once again that Brexit stands to have damaging economic effects, with the bank dialling up the rhetoric. The previous stance had been that any fallout would be largely limited to the financial sector, but given the current disarray over what happens next, there’s mounting concern that the economy could suffer a fresh shock. Potentially disruptive European parliamentary elections are due to be held in May—something which could also change the overall sentiment of the European Union. More nationalist politicians are expected to be voted in, and the Eurozone as a whole appears to be in for something of a volatile year ahead.

Meanwhile, the US government shutdown shows no signs of a break, with the situation becoming increasingly costly for the economy. However, there may be some solace on the horizon in terms of a guarantee that federal workers who have missed salary cheques will receive back pay once the government reopens. This may help mitigate some of the more lasting downside to the economy, although as has already been cautioned by a number of US companies, the situation will have a significant impact on their performance. Despite all of this, the US Dollar continues to recover recently conceded ground as a safe-haven asset, and there seems to be little reason to believe a quick reversal in sentiment will be forthcoming.

GBP/USD

After the sharp gains on Tuesday night, the Pound has traded in a tight range against the Dollar. Clarity over what happens next in terms of Brexit could provide fresh support for Sterling, although only if Theresa May’s leadership isn’t seen as being at risk.

EUR/USD

The Euro is finding itself under renewed pressure against the US Dollar and remains well below last week’s highs. Concerns over the health of the Eurozone economy are dominating here.

GBP/EUR

The Pound appreciated sharply off the back of Tuesday night’s vote in parliament but attempts to continue pushing higher are proving difficult to deliver. Meaningful direction over what happens next in Brexit is arguably necessary for a break out from the current range to be seen.