Good morning,

GBP: Something has to give

The UK is once again less than a week away from leaving the European Union without a deal with this Friday at 11pm still the legal default as to when – without an extension, revocation or deal – the current Article 50 process will close.

Sterling’s performance since Wednesday is crucial to understand just how bored/tired/distracted the market is going into this week. Good news has fewer and smaller spikes higher in the pound with no-deal risk also limiting the chances for a sterling blow-out higher.

We have previously talked about GBPUSD getting into the 1.40s on the back of passage of the government’s withdrawal agreement; that top could now be as low as 1.36 as investors now focus on the damage done to the wider UK economy as a result of the lack of certainty and the continued belief that whatever may happen, we will  end up back at the polls for a general election soon.

The focus this week will be the European Council meeting on Wednesday at which details of how long and under what circumstances the UK can extend the Article 50 process further into the future will be discussed. We expect that a long extension – up to a year – will once again be floated with the chance for the UK to leave should the withdrawal agreement be passed by the Commons before that.

Similarly, talks between Prime Minister May and Jeremy Corbyn are ongoing with headlines from that also likely to move the pound as and when they emerge.

There is no UK data today.

USD: Grinding higher

There is not one singular piece of news that is moving the USD this morning with the US dollar taking its cues from China, oil and global growth concerns. Over the weekend, Director of the National Economic Council Larry Kudlow said that the US and China were getting ‘closer and closer’ to a trade deal and that talks would continue this week. There is still a lot of expectation that something solid that both Presidents Trump and Xi can sign will be agreed by the end of the month.

We are also watching oil prices this morning as it moves to a five month high given supply outages in Libya. While this increase is unlikely to make much of an impact on corporate pricing and, therefore, inflation, the risks are there.

Friday’s payrolls report showed an economy that is still able to create jobs at a decent rate albeit the overall tone was one of normalisation given a poor start to the year. As we noted in our webinar last week, looking forward to Q2, the chances of a recession or a significant downturn in the US looks overblown to us and dollar still has room to run higher as well.

Have a great day.