Sterling leaps to one month high on transitional Brexit agreement

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20 March 2018

thomasdodds

Sterling jumped by almost one percent against the US Dollar on Monday after it was announced that Britain and the European Union had agreed a transitional Brexit period.

T
he Pound smashed through the key 1.40 resistance level versus the Dollar just before 10:00 UK time yesterday morning on word of a possible agreement. The currency then made another fresh upwards charge after the EU’s chief negotiator Michel Barnier confirmed the news just before midday. Barnier claimed that the deal, which he cited was a ‘decisive step’, would last from 29th March 2019 to December 2020 and would lead to an ‘orderly withdrawal’ of the UK from the bloc.

While an agreement of a deal was largely expected ahead of this Thursday’s EU Summit, there were concerns that the deadlock over the Irish Border could thwart a possible deal. The proposed deal will instead include an emergency ‘backstop’ option that would see Northern Ireland remain in parts of the single market if no deal was reached. With the transitional period now agreed, parties on both sides can turn their full attention to negotiations over trade. Any sort of indication in the coming weeks that the UK could be set for a ‘soft’ Brexit would, we think, provide further headwinds to a Sterling rally.

This week will be a particularly hectic one for the Pound. Brexit developments will be supplemented by this morning’s inflation and tomorrow’s labour data. We then have the small matter of the Bank of England meeting on Thursday, which could confirm our suspicions that the central bank is on course to hike interest rates again at its May meeting.

ECB policymakers‘ shift debate from QE to rate hikes’

The Euro also gained ground on the greenback yesterday as news on the transitional Brexit deal raised hopes that the UK’s exit from the bloc would be less damaging than some had expected. A report that suggested the European Central Bank were shifting their debate from bond purchases to the path of interest rates further supported the currency. The Reuters report claimed that policymakers at the ECB were comfortable with market pricing for a rate hike by mid-2019 and that even some of the more dovish members of the committee backed a QE end this year.

With events elsewhere taking center stage, the US Dollar was driven largely by idiosyncratic factors from abroad. The market should begin shifting its attention to Wednesday evening’s Federal Reserve meeting. As we have mentioned in our FOMC preview report, we think that an upward revision in the central bank’s ‘dot plot’ could provide decent support for the US Dollar this week.