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Sterling soars again as revised agreement heads to Parliament
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21 October 2019
Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.
Politics drove currency markets last week, as positive Brexit news buoyed sterling and other European currencies rose in the pound’s wake.
This week the focus should remain squarely on Brexit developments, though any US-China headlines will also impact sentiment. The ECB meeting and Eurozone PMIs of business activities out Thursday are the policy and macro highlights of the week, respectively.
GBP
The new Withdrawal Agreement negotiated by Boris Johnson’s government did not get an up-or-down vote in Parliament over the weekend. Instead, lawmakers forced Johnson to request an extension. As this is written, it appears that the EU is ready to grant a requested three-month extension if the deal does not secure Parliamentary approval next week.
We stick to our view that an extension followed by a general election is the most likely outcome, and the possibility of a second referendum with Remain as one of the options cannot be ruled out.
EUR
With little important data out of the Eurozone, the common currency traded off of sterling and the dollar in response to both Brexit developments and the increasing sense of optimism around a US-China trade deal.
The euro has rebounded unambiguously from its early-October lows and is not far from the middle of its three-year range against the dollar. The PMIs remain the most important data point out of the Eurozone, and it is quite possible that Brexit optimism among business managers will drive a positive surprise. We expect little news out of Draghi’s last ECB meeting next week, before the baton passes on to Christine Lagarde.
USD
Dollar weakness continues to be driven by a combination of investor optimism and risk-seeking worldwide. Last week, soft retail sales numbers also contributed to dollar bearishness. A raft of second-tier data, including multi-month low housing starts and industrial production, also fell short of expectations. This all but cements the case for another interest rate cut from the Federal Reserve when the central bank next meets at the end of the month.
There is not much critical data on tap for this week, so we expect the dollar to continue trading off news elsewhere, particularly Europe and Brexit.
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