Sterling remains on its upward path; Euro battles a dimmer growth outlook

​​​​​Today's news headlines:

  • ‘ECB warns Eurozone at risk of further slowdown’. The central bank now believes the currency bloc’s slowdown could potentially be longer-lasting than the temporary loss of momentum it previously envisaged. While the altered outlook has not yet triggered a change in monetary policy, ECB Chief Mario Draghi indicated that policymakers would intervene if the data remains as disappointing as it has been recently. (Financial Times)
  • ‘Bank of England has been preparing for a hard Brexit since the leave vote, Carney says’. Despite having been criticised for ‘scaremongering’ the British public at the time of the vote, Carney says the bank’s economic predictions have broadly been borne out. (CNBC)
  • ‘Senate seeks solution to open government, Trump insists on wall’. A new attempt to end the US government’s shutdown was undertaken yesterday as senators put forward two measures aimed at re-opening the government, neither of which garnered enough votes to pass. Talks are ongoing. (Reuters)

An easing of concerns about the likelihood of a no-deal Brexit, together with some strong data releases, have driven some impressive gains in the last few days for Sterling, with the currency reaching an 11-week high mid-week. After a brief breather yesterday, early morning trade saw the British currency back on its upward trajectory after a report that Northern Ireland’s Democratic Unionist Party (DUP) will support Theresa May’s Brexit deal at a key parliamentary debate next week. The debate will also involve discussions on alternative Brexit plans that MPs have proposed, including delaying the 29 March Brexit deadline. With May under increasing pressure from her top government ministers, as well as from some economically-critical businesses such as Airbus, to commit to avoiding a disorderly exit from the EU, it’s starting to seem less and less likely that such an event will occur. This is good news for the Pound, although short-term volatility will persist with the ever-looming possibility that a messy divorce from the bloc does occur or that markets are faced with another general election.

The currency bloc is also facing problems with the European Central Bank (ECB) following in the footsteps of the International Monetary Fund (IMF) earlier in the week and downgrading its growth forecast. The Euro fell sharply as a result. ECB President Mario Draghi admitted that the central bank had previously seen the Eurozone’s slowdown as temporary, but that factors such as global trade uncertainties, geopolitical issues, and financial and emerging market volatility are generating a challenging headwind that will see the loss of economic momentum last longer than previously anticipated. Monetary policy was kept unchanged, as widely expected, although the door was left open to the possibility of an interest rate hike after the summer. Investors and economists are not convinced this will materialise with some predicting it won’t happen until after the end of Draghi’s eight-year term as President later this year.

Meanwhile, the US Dollar found some support from Commerce Secretary Wilbur Ross’ comments that the US and China are far from resolving their trade dispute.  He remarked that optimism about next week’s meeting between the two superpowers resulting in some sort of solution to the current impasse is misplaced. This boosted the Greenback on the day. However, the Dollar could be in for a tough time as a number of factors look set to put a dampener on its impressive rally of 2018. These include slowing global and domestic growth (not helped by the ongoing government shutdown, now in its 34th day which risks suffocating the economy), and the possibility that the Federal Reserve takes a break from its rate-hike cycle. After last year’s four rate hikes, which played an integral part in lifting the Dollar, the futures market is now pricing in none for this year.

GBP/USD

After a steady three-day climb, Cable took a break yesterday but moved higher again in early morning trade as hopes that Theresa May will find support in parliament for her Brexit deal prompted more buying interest. With a lack of meaningful data out of the UK, besides BBA Mortgage Approvals and CBI Reported Sales, Brexit is likely to continue providing the most motivation in the currency pair’s movements. This could be a positive influence as more clarity gradually emerges over the EU withdrawal deal.

EUR/USD

By contrast, investors moved away from the Euro following the ECB’s gloomy growth outlook with the currency hitting a new monthly low against the Dollar. With little in the way of impactful data due in the next week, the pair could remain range-bound until the release of Eurozone preliminary growth numbers next Thursday.

GBP/EUR

It seems as though the Pound is set to continue its gains over the Euro as hopes for more Brexit certainty attracts more buyers, while the ongoing weak European data weighs on the Euro.