Euro finds its feet ahead of European Central Bank meeting

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The common currency broke out of its recent range yesterday, rallying to its strongest position in nearly two weeks against a broadly weaker US Dollar.

W
hile there was no real catalyst for the near half a percent upward move in EUR/USD yesterday, investors are taking on the general view that the Euro has been slightly oversold in recent weeks. As disappointing as recent macroeconomic data has been out of the Eurozone, news out of the US economy has also been far from terrific and does not necessarily justify the near 3% decline we’ve seen in the critical cross since early-January. Last week’s US labour report was indicative of this, showing a slowdown in earnings growth to 3.2%.

With data releases fairly light on the ground in the first half of this week, the markets will be focusing heavily on tomorrow afternoon’s ECB announcement. With no change in policy expected, the key to the Euro could be the bank’s forward guidance on interest rates. Given the aforementioned soft Euro-area data, we think there is a chance the bank could push back its expected timing for the first rate hike in the upcoming cycle to the end of Q1 2020, versus the end of 2019 mentioned at the previous meeting. This would undoubtedly lead to a fresh sell-off in the Euro.

Will Brexit be delayed again this week?

It was all quiet on the Brexit front on Monday, with a lack of significant developments ensuring that the Pound traded within a fairly narrow range just above the 1.30 mark against the USD.

Theresa May has formally asked to extend the Brexit deadline to 30th June and will be hoping that this request is accepted by EU leaders at their summit on Wednesday. There have, however, been reports that a number of the major players within the bloc are ramping up preparations for a ‘no deal’. Should the EU deem the delay to 30th June as insufficient to break the current deadlock, the request could be rejected in favour of a ‘flextention’. This would extend the deadline by one year, with the option of ending it early should UK politicians vote in favour of a withdrawal agreement in the interim.

News of a one-year delay to Brexit would, we believe, lead to a sharp upward move in Sterling. By contrast, should no extension be agreed upon by Friday, the UK’s default option remains leaving the bloc with no deal in place. This, as we have reiterated on numerous occasions, would spark a sharp sell-off in the Pound against every other currency.

In the meantime, cross party talks between the Tories and Labour continue. With the clock winding down to Friday, there is now no chance whatsoever of another vote being held before then.

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