Hopes of Brexit deal given a boost after Germany ‘drops key demands’

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6 September 2018

thomasdodds

Sterling jumped by around one percent against both the US Dollar and the Euro on Wednesday after some positive news on the Brexit front fuelled hope that a deal with the EU could be reached before the October summit.

T
he Pound has experienced a difficult few weeks of FX trading, with currency markets becoming increasingly concerned over the state of the Brexit negotiations. Fears that a deal on Brexit will fail to be reached in time for the October summit has raised concerns that Britain could conceivably leave the EU without a deal in place. Some betting markets have even been placing as high as a 60% implied probability that a deal will fail to be reached before 1st April 2019.

A report released from Bloomberg yesterday did, however, dispel some of these concerns, while reaffirming our view that both sides of the negotiations would do whatever it takes to avoid a ‘no deal’ scenario. The report suggested that the German government had abandoned many of its key Brexit demands and was willing to accept a slightly less detailed agreement with the UK in order to get a deal done. This is an encouraging sign that suggest officials in Europe are just as keen to avoid a ‘no deal’ Brexit as Theresa May’s government.

Overall sentiment towards negotiations will continue to drive the Pound today. We think that more Sterling short positions could be squeezed should optimism remain elevated, which would provide decent support for the currency today. As we have mentioned previously, the very high incentive on both sides means that we believe a deal will be agreed at either the October or December EU summit, which would provide scope for a bounce back in the Pound from its currently undervalued levels.

Euro edges higher on positive Brexit news

The EUR/USD rate was given a boost from yesterday’s Brexit news, given the degree to which a deal would benefit the Euro-area economy. Macroeconomic news out of the Eurozone yesterday was also largely positive which provided further fuel to the common currency’s rally. Encouragingly there was a modest uptick in the crucial composite PMI, which edged to 54.5 from 54.4. The latest retail sales number missed expectations, although there was an upward revision to the June number that made up for this shortfall.

With Friday’s US labour report now within our sights, we look to this afternoon’s private sector job creation number across the pond to gauge the strength of tomorrow’s more significant nonfarm payrolls release. The ISM non-manufacturing PMI and a speech from FOMC member Williams makes for a busy day in the US.