Pound hits two-week high ahead of crucial May-Juncker meeting

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20 February 2019

thomasdodds

Renewed optimism that UK Prime Minister Theresa May could make significant progress towards securing parliamentary backing for her Brexit deal this week helped lift the Pound to its strongest position against the US Dollar since early-February on Tuesday.

M
ay will be meeting senior EU official Jean-Claude Juncker in Brussels today in the hope of reaching an alternative solution to the Northern Irish border ‘backstop’ – the most contentious sticking point within the entire Brexit process. A government spokesman stated that the meeting was a ‘significant’ part of the process to securing an alteration to the PM’s Brexit deal, raising hopes that some form of a breakthrough could be reached.

The sharp upward move in Sterling, which rallied by almost one percent versus the greenback does, however, appear to have been slightly excessive and unwarranted, in our view. It is still far from certain that May will get any concessions whatsoever from the EU this week, with leaders within the bloc continuing to state that a reopening of the withdrawal agreement is off the table.

A perceived lack of progress from today’s discussions could, therefore, see a fairly abrupt correction in the Pound, which remains highly susceptible to violent moves in either direction in the lead up to the 29th March EU exit date.

US Dollar slides ahead of FOMC minutes

The Euro edged modestly higher against the US Dollar yesterday, briefly touching its strongest position in ten days. The common currency had initially lost ground as European markets opened on Tuesday after some disastrous Italian industrial orders numbers raised concerns over an extended slowdown in the Eurozone’s third largest economy.

No distinct catalyst was behind the Euro’s subsequent recovery, with investors instead focusing on the ongoing saga regarding a possible US-China trade deal. Some encouraging comments in recent days from those close to discussions, namely US President Trump, has raised hopes that a deal could be struck in the coming weeks. This, we believe, would be bad news for the US Dollar, given it would trigger an unwinding of safe-haven flows, and positive for those currencies deemed riskier, the Euro being one of those.

News out of US-China trade will remain one of the biggest market movers this week. Tonight will also see the release of the latest set of FOMC meeting minutes. We think that the key to the US Dollar reaction will be whether policymakers indicate whether the current rate hike cycle is at an end, or merely paused for the near term future. Any hint that suggests the former could see a broadly weaker greenback in the second half of this week.