Sterling pressured as Brexit panic builds

​​​​​Today's news headlines:

  • 'Pound weakens as May's faces resistance for three-month Brexit extension’. Risk of no-deal Brexit rises as Brussels pushes Westminster into a corner, although with an abrupt departure economically damaging for both sides, a long extension could still be seen. (Reuters)
  • 'Fed holds line on rates, says no more hikes ahead this year’. The reversal comes just three months after saying two rate hikes would be seen in 2019, while quantitative tightening will also conclude in September. (CNBC)
  • 'Fitch doesn’t buy ECB’s signal that further QE isn’t needed’. The credit ratings agency has said that it believes the central bank will need to resume bond purchases sometime towards the end of 2019, a move which could put the Euro under pressure. (Bloomberg)

Brexit

A summit of EU leaders convenes in Brussels today, and Brexit will be at the top of the agenda. Donald Tusk has advised Theresa May that a short extension to the divorce process would only be possible if MPs backed the withdrawal agreement as it stands. The move further elevates the risk of a no-deal Brexit, and unsurprisingly, the Pound fell yesterday. The damaging economic consequences have little appeal, so the more likely outcomes would be accepting the offer that’s on the table, or a much longer extension to allow a general election or second referendum to be held. This is likely to go to the wire so the Pound could see further selling in the week ahead.

Federal Reserve

The US central bank surprised markets yesterday with a more cautious tone than had been expected. Gross Domestic Product (GDP) forecasts have been lowered, unemployment is set to rise, and the projection of further rate hikes for 2019 was revised to zero. A global economic slowdown was also noted, so although the US Dollar lost ground from this move, its safe-haven appeal could drive gains in the longer-term.

ECB

The Euro enjoyed a bounce off yesterday’s Federal Reserve statement. However, the Dollar’s safe-haven appeal, combined with the belief that the European Central Bank (ECB) will soon need to restart its bond-buying stimulus measures could ensure any gains will be short-lived. The ECB remains open-minded, but a report released yesterday by ratings agency, Fitch, suggested the central bank would be forced to resume quantitative easing by year-end.

GBP/USD

The Pound tested one-week lows against the US Dollar after concerns rose that a no-deal Brexit might still be seen. The cautious words from the Federal Reserve helped reverse some of the fall, but Brexit uncertainty is likely to dominate.

EUR/USD

The Euro posted its biggest one-day gain in almost two months and a fourth consecutive day of gains over the US Dollar yesterday. The pair has been posting steady gains since the ECB meeting two weeks ago, but a subdued Eurozone economic calendar has also been helping. The rally may start to lose momentum as month-end data releases emerge.

GBP/EUR

The Pound posted its biggest one-day fall against the Euro in just over a week yesterday, with Brexit concerns dominating. The Pound is approaching levels of support, but quite clearly, the Brexit news flow is Sterling’s main catalyst.