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Sterling To Remain Supported In Short-Term Amid Brexit Back-And-Forths

Published 03/25/2019, 07:12 AM
Updated 07/09/2023, 06:31 AM

GBP: Use your indicators

The moves of late Thursday night and Friday morning in Brussels have allowed sterling to bed down as we enter the final few days of the Article 50 period. Regardless of which way a vote goes this week, whether that vote happens in the first place or whether we see Prime Minister May finally leave Downing Street, the U.K. will not be exiting the European Union this Friday.

The back and forth of what happens next is likely to see sterling remain supported in the short term with investors and analysts still ascribing a very low probability to the chance that the U.K. leaves without a deal. How much parliament takes control and whether any indicative votes are held, will be what drives sterling today and through the coming weeks but, unfortunately, the timeliness of such moves cannot be scheduled. We will move higher on some headlines and lower on others and we will only know which ones are which when the news breaks.

We still remain optimistic that a deal and/or long extension to the Article 50 process can be found and that sterling will rally as a result. Despite the march in London on Saturday afternoon, we think that there is a very low probability that the U.K. will decide to revoke Article 50 entirely or push towards a second referendum.

USD: Still where people want to be

Despite the Federal Reserve’s decision to pull back from its plans to raise interest rates in 2019, the dollar has remained largely pretty solid. We expect this to continue in the short term at least. Firstly this is down to an ongoing lack of good news elsewhere in the world, especially in the G10.

Secondly, the way that investors make money in currency is by collecting interest payments. This ‘carry’ as it is known, is higher in the US than all of the G10 and comes with a lot less risk than most courtesy of its status as the global reserve currency.

What we mean to say is that just because the dollar may have lost one of the pillars of its recent run higher that does not mean that it will now start to meaningfully weaken.

The publication of the Mueller report on suspected collusion between the Trump Administration and Russia is not likely to move markets that much.

EUR: Holding out for German strength

Last week’s run of poor data from the Eurozone has kept the euro from meaningfully moving higher purely on its own merits; movement in EURUSD last week was more a function of Thursday and Friday’s Brexit news.

A good outcome on Brexit remains a substantial positive for the European single currency, if and when that happens, but for more sustainable growth in the euro, better data is needed locally. Today’s IFO – a survey of German economic sentiment – may be able to help when published this morning.

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