Sterling rises for a second day as May talks up Brexit deal

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26 September 2018

thomasdodds

Sterling ended higher for the second straight session against the US Dollar on Tuesday, with investors unwinding bearish bets on renewed optimism over a more favourable Brexit deal.

B
rexit secretary Dominic Raab raised hopes that a deal would be struck earlier in the week by claiming that he was confident progress in negotiations could be made. The UK currency was buoyed further by comments from Theresa May yesterday evening, with the Prime Minister stating that she was ‘confident’ in sticking to the Brexit timeline. May also said that she still believed a good deal with the EU was possible, reiterating that the UK government will be given a clear choice on whether to support her Brexit deal.

While news out of the negotiations undoubtedly took a turn for worse of late, and the chances of a ‘no deal’ Brexit increased, we think May’s hard line stance towards the EU is more of a negotiating tactic and that a deal will be agreed in either October or November.

Federal Reserve to hike rates, hint at December move

The EUR/USD rate spent much of trading yesterday fairly range bound as investors awaiting clues from the Federal Reserve this evening as to the pace of additional interest rate hikes.

With another rate hike from the Fed this evening now fully priced in going into the meeting, currency markets will instead comb through the accompanying commentary for possible hints as to another hike in December. As we mentioned yesterday, the key for the US Dollar could be any comments from the FOMC regarding the recent strong news on growth and, crucially, wages. We will also be paying close attention to the latest growth and inflation forecasts. With the market seemingly expecting a hawkish tilt, there is a risk that these forecasts are not upwardly revised by as much as investors are anticipating, which could mean that the recent fall in the greenback continues.

Over in the Eurozone, ECB rate-setter Peter Praet spoke on Tuesday. Praet talked up a ‘robust’ Euro-area economy, although stated that it would take a number of months before higher wages begin to impact inflation in the currency bloc. With no major economic data releases in the Eurozone today, attention will be firmly on the FOMC meeting. Next up in terms of data will be Thursday’s German inflation figures, followed by the Euro-area wide numbers out on Friday morning.