Sterling jumps higher on positive Brexit headlines

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1 May 2019


Sterling jumped to a two- week high on Tuesday on reports that talks between the Conservative Party and Labour had taken a turn for the better.

number of news outlets reported yesterday that Prime Minister Theresa May was hoping to seek a consensus over Brexit by mid-next week. This looked slightly more likely following comments from those privy to the talks, including Tory de facto deputy, David Lidington, and Labour shadow secretary Sue Hayman. Lidington stated that the discussions were ‘positive’ and ‘productive’, raising hopes that an accord in parliament could be reached before the 22nd May European Parliament elections.

Next up for Sterling will be tomorrow’s Bank of England meeting. As we said earlier in the week, we think that the most likely scenario will be for a unanimous vote in favour of no change in rates and a mostly unchanged statement. That being said, we do believe there is a risk the BoE downgrades its near term growth forecast given the prolonged Brexit uncertainty. If, however, some policymakers deem that the Brexit delay should not stop the bank responding to macroeconomic data, then we could see a decent rally in the Pound in the second half of the week.

Strong growth, German inflation data lifts Euro

The Euro had a rare good day yesterday, rising back above the 1.12 level ahead of this evening’s Federal Reserve meeting.

Some solid data out of the Eurozone helped alleviate some concerns over a broad economic slowdown in the bloc in 2019. The first quarter growth figures were slightly better-than-expected, while the German inflation numbers were much higher than the market had priced in, boding well for Friday’s Euro-wide number. Headline inflation in Europe’s largest economy roared back to 2.1% in April, a considerably faster pace than the previous 1.4% (Figure 1). While the late Easter holiday may ensure that the bounce proves temporary, it is an encouraging sign for Euro bulls nonetheless.

Figure 1: German Inflation Rate (2016 – 2019)

Will Fed hint at interest rate cuts this evening?

Attention in the currency markets now shifts firmly to this evening’s FOMC meeting.

As we mentioned earlier in the week, we do not expect too much in terms of major market moving news from the central bank. We do, however, think that policymakers will talk up the recent impressive performance in the US economy, particularly after March retail sales, manufacturing and jobs growth all moved higher. With Fed funds futures pricing in an interest rate cut later this year, an overreaction in our view, a statement indicating that no discussion on the possibility of policy easing has been had could lift the greenback even higher this evening.

The Fed’s rate decision will be announced at 7pm UK time tonight.