Good morning,

GBP: Three things to watch for sterling

The sting of a night of amendment votes on the government’s Brexit plans were eased by Tuesday’s news of further votes on Brexit in the week commencing March 11th. Sterling has managed to hold up around the 1.33 level against the USD overnight but its ability to hold up and advance from here is contingent on three things in our opinion.

First, we must see how the hardline Brexiteers of the European Research Group break; do they take May’s Brexit over no Brexit at all? Second, we cannot rely on complete EU agreement on all matters and ructions in Brussels will add to uncertainty over how an extension or delay of Brexit could be formed. Third, the length of any extension is crucial as something that takes us past the EU elections in May might be too much for Brexiteers to swallow.

Our outlook for sterling against the USD over the coming weeks is as such:

  • A deal sends GBPUSD back towards 1.42
  • A no-deal would be a huge shock and would put GBPUSD around 1.15
  • Immediate relief rally to 1.36 in the event of a no-deal being taken off the table
  • A short extension is likely fully priced by now and could see GBPUSD fall back to 1.30
  • A long extension (over six months) would see a similar reaction to a deal but maybe a bit more muted

For now, we must wait to see how the EU and ERG shake out in the coming days.

CNH: Trade pains delayed for now

News that the US and China are set to formally suspend any scheduled increase in trade taxes ahead of tonight’s deadline came as a relief to global markets but tough words from the US Trade Representative Robert Lighttizer ensured that investors were unable to celebrate for long. The US wants deep structural change in its trading relationship with China and will not agree to a trade deal that simply requires China to buy more American goods.

Chinese manufacturing confidence was unable to help overall investor sentiment either as it dropped to 49.2 in February from 49.5 in January, close to the weakest levels since early 2016.

EUR: Nothing doing

The next two days will see inflation measures published from around the Eurozone and, while most may rise as a result of increasing oil prices, the underlying picture looks weak and not in a position from which analysts can start arguing that the European Central Bank should be raising interest rates anytime soon.

Alongside weak growth fundamentals and pressure on international trade, the single currency looks unlikely to press much higher anytime soon.

Have a great day.