21 Mar 2019: Sterling dips as Brussels gets tough over Brexit Extension

21 Mar 2019: Sterling dips as Brussels gets tough over Brexit Extension

Sterling dips as Brussels gets tough over Brexit Extension

March 21st: Highlights

  • May to request extension to June 30
  • Dollar hit hard as dovish Fed abandons “normalization” policy
  • EU to soften stance on members joining the single currency

May blames MPs for Brexit debacle

UK Prime Minister Theresa May last night made an impassioned speech from Downing Street in which she said she was on the side of the British people in their frustration that Parliament couldn’t deliver Brexit within the time that had been agreed.

May said she would go to Brussels to request an extension until June 30th but earlier in the day, EU Council President Tusk had said that an extension would only be granted if Parliament voted in favour of the current Withdrawal agreement.

So, after close to three years of negotiations, false dawns and internal wrangling, Brexit has been distilled down to a seemingly stark choice; May’s deal or no deal.

The pound reacted badly to yesterday’s news as the markets “doomsday scenario” of no deal was resurrected. It fell to a low of 1.3146 but rallied to close at 1.3196 following the Fed’s announcement (see below).

There are sure to be further developments today as it is likely that Mrs May will be forced to obtain the Speaker’s approval for a third meaningful vote despite his comment that that can only happen if there are “substantial” changes to the Bill. The PM will argue is that the substantial changes are seen in the likely change to MPs voting intentions.

Data released yesterday showed that inflation ticked up a little in February with CPI reaching 1.9%, still below both the Government’s 2% target and wage inflation.

Today’s Bank of England policy meeting will vote 9-0 in favour of no change to short-term rates and Governor Mark Carney is likely to reiterate his support for whatever happens over Brexit and confirm that the Central Bank is prepared to add liquidity and support to the market in the event of a no deal Brexit.

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Dovish Fed to leave rates unchanged through 2019

Jerome Powell, the Chairman of the Federal Reserve had primed the market to expect a slightly dovish evaluation of the Fed’s intentions in his press release following yesterday’s FOMC meeting.

What he delivered was far more dovish than anyone expected. He slashed forecasts for economic growth and had “Fed watchers” rushing to place bets that not only would the Fed leave rates unchanged for the rest of the year but that the next move would be a cut.

Powell also said that the Fed would “bring down the curtain” on its reduction of the size of its balance sheet, effectively ending its efforts to bring about “normalization” of monetary policy.

The dollar suffered following Powell’s comments with the index falling to 95.74 and closing at 96.02. Overnight it has remained under pressure, so far (06.00GMT), reaching a low of 95.83.

While it has been clear that economic data has pointed to a slowing economy, the reaction of the Fed shows a degree of proactivity but also risks claims that it is using a hammer to crack a nut.

Traders will now be primed to expect the worst from upcoming data releases but with more than a month to wait for the Q1 GDP report, speculation will grow that the economy is slowing far more than originally thought.

EU softening stance on Eurozone membership

During the Brexit debate, there has been a false rumour circulating that members of the EU would be forced to adopt the single currency by the end of 2020. This was rumoured to include the UK and Denmark (should Brexit fail) despite them having an explicit opt-out of any such demand.

It now transpires that the seven EU states that don’t use the single currency will not face any pressure to join even after they have fulfilled the economic requirements for entry.

While this appears relatively insignificant, it is an admission that membership of the Eurozone is not only “not for everyone” but opens the risk that it could provide leverage for any nation which thinks “we have tried this, and it doesn’t work for us”.

That may appear to be a giant leap but should there be a nationalist/populist upsurge in the European Parliamentary elections in May, such thoughts could be considered at both ends of the economic scale. Germans may consider that its economy (facing recession) is not benefitting from membership, while Italians, who have already shown their disapproval by opting for a nationalist Government, yearn to be free of the budgetary straitjacket imposed by the ECB and Brussels.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”