Sterling lifted after Theresa May’s victory; ECB in focus

Today's news headlines:

  • ‘French budget position not like Italy’s, Brussels says’. EU Economy Commissioner offers French President Emmanuel Macron some breathing space. (Financial Times)
  • ‘ECB will say goodbye to quantitative easing, but when will it hike rates?’. Today’s ECB meeting is expected to confirm the end of bond-buying. (MarketWatch)
  • ‘Italy lowers deficit in revised budget to avoid EU sanctions’. A new target of 2.04% down from 2.4% is proposed. (Associated Press)
  • ‘British pound surges as May wins confidence vote’. Odds of a new election still remain high. (CNBC)

Last night, Theresa May successfully saw off a leadership challenge, although the margin of victory was far from convincing and what this means regarding Brexit’s next steps remains to be seen. The Pound has found some modest support off the back of the news, but gains could prove limited. With the Irish border question still unanswered, the Conservative Party’s ability to complete the Brexit process and hold onto their wafer-thin majority in Parliament remains a challenge. The accompanying political uncertainty, including the threat of opposition parties tabling a motion of no confidence in the Government, has the potential to continue weighing on the Pound.

The European Central Bank (ECB) convenes today to make its last call over monetary policy for the year. This meeting is significant as it’s widely expected to signal the end of the bond-buying process which the ECB has been conducting for almost a decade, in a bid to stimulate the Eurozone economy. While this may be fully priced in, questions remain over the timing of the first ECB rate hike since the credit crisis. With the Eurozone economy not growing at the pace some may have expected and the impact of the bond-buying withdrawal still to play out, there is a genuine risk that the target of a rate hike in Q3 2019 may not be met. Any indication that a delay will be seen could have the potential to undermine the common currency.

The European Commission appears to be avoiding any escalation of budget issues as it eyes spending from both Rome and Paris. Both respective governments have made anti-austerity moves of late, and the risk had been that differential treatment would escalate an already difficult situation. That hasn’t been seen, although the risk remains that other member states may now try to push through similar measures. Diplomacy is prevailing for now, although any signs of cracks emerging could see the Euro coming under pressure again.

Data from the US is relatively thin on the ground today, with next week’s Federal Open Market Committee (FOMC) meeting holding the most potential for the US Dollar in the short-term. Expectations that a fourth rate hike for the year will be seen have been ticking higher in recent days, although opinion remains split within the market. Yesterday’s inflation data fell in line with forecasts and provided no fresh clues. However, the pace of decline in consumer prices still lends some support to the idea that the Federal Reserve could elect to hold fire in the final meeting of 2018.

GBP/USD

The promise of clarity off the back of yesterday’s Conservative party leadership election provided support for the Pound, albeit starting from a very low base. GBP/USD added two cents at one point during the session, and although some of these gains have now been eroded, the pair has been relatively stable in the wake of last night’s ballot result. Political rather than economic risk remains present for the Pound.

EUR/USD

Progress over Eurozone member state budgets and read across from Sterling’s rally helped lift EUR/USD around half a cent during Wednesday’s trade. The big risk now is the ECB’s statement on quantitative easing; confirmation that bond-buying is complete has the potential to initiate something of a relief rally on the pair.

GBP/EUR

The win for Theresa May has been less than optimal for Sterling against the Euro. Had the PM lost this vote, the expectation was that Article 50 would be delayed, in turn reducing the risk of a no-deal Brexit. The Pound may be off yesterday’s lows against the Euro, but it remains deeply depressed. Any ECB inspired rally for the common currency would risk pushing the Pound back to yesterday’s lows.