Volatile week dominated by Brexit lies ahead
- 'Growth worries bolster Dollar as Sterling dips before Brexit vote’. Factors including last week’s growth revisions from the European Central Bank (ECB) and poor Chinese trade data are serving to bolster the US Dollar, while renewed Brexit uncertainty sees Sterling slide. (Reuters)
- 'Europe’s most important bond edges back toward negative territory’. Concerns that Europe is sliding towards recession have pushed investors into low-risk products, driving yields on the German 10-year government bond close to zero for the first time since October 2018. (Wall Street Journal)
- 'Brexit vote must be put on hold, MPs warn Theresa May’. Although both sides are still reported to be working on a revised proposal, suggestions are that the government could swap tomorrow’s vote for one laying out terms that may be acceptable for dealing with the Irish backstop issue. This could provide clarity for the EU over the sort of deal that would be acceptable. (The Times)
The Pound has been under sustained pressure since Friday afternoon. Hopes of a Brexit breakthrough were dashed ahead of the weekend break, which saw markets start to discount the possibility of the UK leaving the EU with a deal on March 29th. This opens up one of two possibilities; either a disorderly no-deal Brexit with the accompanying economic shocks, or a request to EU leaders to push back the date of departure. With this being a highly fluid situation, news of further developments has the potential to result in marked swings for the currency in the coming days.
Falling German bond yields are seen as a signal of weakness in the Eurozone economy. Investors are seeking safe-havens for their Euros with German government debt being seen as the safest choice. This has served to drive yields across the bloc closer to zero. Further declines in government bond yields will do little to instil confidence in the common currency.
US jobs report
Job creation may have slowed in February, but the unemployment rate in the US was reported as having fallen in Friday’s data release, while average wages were up 3.4% on the year. This combination fuels concerns over inflationary pressures in the economy and could push the Federal Reserve to take a more hawkish stance over monetary policy, in turn, lending support for further US Dollar gains in the medium-term.
The Pound is now trading at lows against the US Dollar not seen for almost three weeks. Brexit uncertainty is dominating, so any developments from Brussels or Westminster could lead to some significant volatility.
The Euro has managed to recover some of the ground it lost against the US Dollar last Thursday in the wake of the European Central Bank’s policy announcement, although remains around levels previously seen five months ago. Positive US economic data is likely to keep the Euro under some pressure.
Friday’s Brexit uncertainty saw the Pound post its biggest one-day decline against the Euro since last November. Volatility of this order has the potential to increase as the March 29th Brexit deadline nears, so long as current levels of uncertainty remain on the table.