Pound hits ten week high vs. Euro on delayed Brexit hopes

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23 January 2019


Sterling rose to its highest level against the Euro in ten weeks on Wednesday morning, with the UK currency remaining well supported by growing hopes of a softer Brexit and Article 50 extension.

he rally in the Pound in the past couple of days is somewhat surprising. Theresa May’s ‘plan B’ was very much similar to her ‘plan A’, with the Prime Minister so far failing to acknowledge that a delay to Brexit is probably on the horizon. Investors have instead taken on the view that a hard Brexit is now very unlikely, with the chances of a second referendum on the rise following the parliamentary vote. This, combined with yesterday’s very impressive labour market figures, has allowed the Pound to rally by around one percent against the US Dollar so far this week.

Currency traders will now be awaiting news of amendments to May’s withdrawal bill ahead of the next parliamentary vote, currently scheduled to take place on Tuesday.

Cost of US government shutdown ratchets up

The EUR/USD rate remained relatively range bound for another day on Tuesday, with the ongoing US government shutdown (now entering into its 32nd day) limiting major economic data releases.

The lack of major economic news has actually been pretty positive for the greenback, delaying data that may otherwise confirm that the US economy was losing momentum amid the rising economic cost of the shutdown. Costs to the economy from the shutdown are now estimated to be in excess of $5 billion, amplified by the negative wealth effect for those government employees that continue to go without paychecks. As we mentioned last week, the longer the situation drags on, the greater the chances it begins to filter its way through to softer macroeconomic data.

Will the ECB downgrade its growth outlook this week?

Economic data releases in the US and the Eurozone remain few and far between today, with attention instead turning to tomorrow’s ECB meeting.

The European Central bank will hold its first meeting of 2019 tomorrow amid growing concerns over the health of the Euro-area economy. We expect Draghi to maintain his dovish stance, downgrading the bank’s growth assessment and reiterating that the first interest rate hike since 2011 remains some way off and beyond the summer of this year. It will be interesting to see whether Draghi comments on Brexit, namely whether Europe is suitably prepared for the worst case ‘no deal’ scenario.

The Governing Council will be announcing its rate decision at 12:45 UK time on Thursday, with Draghi’s press conference to follow 45 minutes later.