Time is now running out for the British Prime Minister to secure an agreement from Brussels over changes to the Irish border backstop component of the Brexit deal. At present, the expectation is that this won’t be forthcoming, leaving Theresa May unlikely to win next Tuesday’s vote in parliament. Not surprisingly, the accompanying uncertainty is exerting pressure on the Pound. Since the EU must agree to any potential extension of the Brexit process, Sterling may well find itself struggling to rebound even if MPs do get as far as voting in favour of delaying Article 50 next week.
The European Central Bank reacted perhaps a little more comprehensively than may have been expected yesterday, as it looked to avert another Eurozone recession. The news, centred around an admission that interest rates won’t rise this year, was sufficient to push EUR/USD down to lows not seen since the summer of 2017. With this move, the ECB has clearly set out its position, removing the need to drip feed further dovish news into the market in the near-term. However, the question remains as to whether the monetary policy firepower the central bank has available is sufficient to maintain economic growth.
Wednesday’s ADP Payroll report came in short of expectations, but today’s Non-Farm Payrolls and Average Hourly Earnings could prove even more insightful. Any slowdown here, especially with regard to wage growth, will allow the Federal Reserve to take a more dovish stance when it comes to its own monetary policy. While this isn’t a route to a quick rate cut, it would justify an end to the Fed’s quantitative tightening process, something which would have the potential to weaken the Dollar in the short-term.
The US Dollar experienced a strong rally during yesterday’s dovish ECB announcement. With the confluence of Brexit end-game manoeuvring and the fresh ECB downgrade, the Dollar isn’t likely to relinquish its increasing strength.
The Euro posted its biggest one day fall against the US Dollar in almost nine months yesterday as the extent of the ECB’s stimulus measures were laid out. With German Factory Order data disappointing this morning, the need for intervention is clear, but reversing any economic decline will take time and also be reliant on the global trade outlook. A trade spat between the US and Europe could still surface.
Despite the Brexit uncertainty, yesterday’s ECB announcement was sufficient to drive the Pound higher against the Euro. The pair remains short of last week’s highs, and with no further high-profile economic data expected from either the UK or Eurozone today, Brexit malaise may see fresh Sterling selling in the short-term.