Sterling sees gains extended as Brexit optimism grows

Today's news headlines:

  • 'There actually is a Brexit consensus among U.K. voters’. Surveys show that while the current proposal is unpopular, it’s also seen as a deal which more would be willing to stomach than either no-deal or remaining in the EU. Whether politicians buy this remains to be seen, and the situation is likely to remain confused for some time yet. (Bloomberg)
  • 'China urges US to seek “win-win” relationship amid long-running trade war’. Speaking at Davos, the Chinese Vice President appealed to the US to find a way ahead, claiming that the current backlash against globalisation wouldn’t last. (CNBC)
  • 'All eyes on Mario Draghi as investors look for ECB to acknowledge risks to Eurozone economy’. Today’s policy statement and press conference comes in the wake of IMF growth downgrades for the Eurozone, meaning there’s every expectation that Mario Draghi will now have to adopt a more cautious tone. (MarketWatch)

For more than two years, the Pound has faced repeated selling pressure in the wake of the UK’s decision to leave the European Union. However, as a little more certainty seems to be emerging as to what happens next—namely the idea of a no-deal Brexit looking incredibly unlikely—buyers are starting to move back into Sterling. Against both the Euro and US Dollar, the currency is now trading at levels not seen since the start of November, and although the UK remains exposed to some risk factors, the picture elsewhere is far from rosy, too. The continued government shutdown in the US and the lack of progress over a new trade deal with China is weighing on the Greenback. Meanwhile, expectations suggest the European Central Bank (ECB) will downgrade its outlook for the Eurozone economy today. Sterling remains vulnerable both from the threat of another general election, and also the fact that a no-deal scenario could theoretically still happen, but right now the positive factors appear to be winning out.

The European Central Bank struck at least a moderately confident tone when it met before Christmas, announcing the conclusion of its asset purchase program. This was supposed to be the first step towards normalising monetary policy after a decade of ultra-cheap lending. However, disappointing Eurozone economic readings have been pouring in since the start of the year. Additionally, the International Monetary Fund (IMF) recently downgraded its growth forecasts for the currency bloc, and there’s now the admission that a no-deal Brexit will hit the Eurozone as well as the UK. Against this backdrop, there’s every expectation that ECB Chief Mario Draghi will be obliged to take a materially less hawkish view over just how likely an interest rate hike will be in 2019. Confirmation of this is likely to weaken the Euro as a result.

The US Dollar is struggling for direction as the market continues to question its appeal as a safe-haven currency. Typically, in times of global economic uncertainty, the Greenback stands to benefit, but with the US being instrumental in both the China trade war and also the partial government shutdown which is stifling its own economy, there are growing questions as to whether the usual way of thinking should still apply. Until there are some meaningful developments in the US political agenda, both at home and abroad, then the Greenback may struggle to appreciate much further.

GBP/USD

The Pound saw its biggest one day gain over the US Dollar in more than two months yesterday as buying support for Sterling continued. The Pound remains liable to bouts of volatility in the short-term, but as more clarity emerges over Brexit, the potential remains for further appreciation.

EUR/USD

Despite some disappointing Eurozone Consumer Confidence data yesterday, the combination of a downward revision to the previous month’s figure and concern over the outlook for the US Dollar was sufficient to see the Euro post modest gains. Consolidation has been seen through the Asian session, although today’s ECB statement could initiate a reversal.

GBP/EUR

The Pound has now posted gains over the Euro for nine of the previous 10 days. A cautious statement from the ECB could be sufficient to deliver another rally, although the prospect of Brexit related shocks needs to be accounted for.