Rumours of European Union concessions combined with building anticipation that the UK Parliament will take the necessary steps to prevent a hard Brexit from happening was enough to send sterling to multi-week highs against USD and EUR yesterday. Political editors of several UK newspapers postulated on Twitter yesterday that concessions of the EU on the Irish backstop order may be imminent, which could potentially make Theresa May’s Brexit deal palatable enough to cruise through Parliament at the next vote. In this light, the meeting today between EU President Jean-Claude Juncker and May 17:30 GMT about the backstop option holds great expectations, as we might see some white smoke on this issue. Nevertheless, hopes of EU concessions rose high before and as the current rumours still appear razor thin, the hopeful among us may do well to brace for a disappointment today. In the background of all the Brexit bustle UK labour market data showed that there is still enough tightness in this market to keep the domestically created inflation on track to support a Bank of England rate hike in 2019. A hefty 167.000 added jobs lifted the employment rate up to a new record high of 75.8%, while Average Weekly Wages continue to rise at a pace that’s currently among the highest of the developed economies at 3.4% year-on-year for the months from October to December. Fresh rumours of further defectors, this time from the Tory party, however, have caused some pessimism for sterling this morning as the likelihood of another election rises.
The slight miss in Eurozone’s Current Account and minor beat in the German ZEW Economic sentiment were not enough to move the needle much on EUR, as developments elsewhere mostly determined the direction on euro-crosses. A Bloomberg article today featured an interesting counter message to the current cloud of negativity hanging over the Eurozone lately as it highlighted that the slowdowns in Germany and Italy do not go for the entire bloc. France and Spain, together with a handful of smaller countries like Finland, The Netherlands and Portugal are actually showing healthy growth rates, which raises hopes about the resilience of growth in the Eurozone as a whole in Q2 and onwards. Today sees Consumer Confidence at 15:00 GMT as the main Eurozone data release.
The greenback kept on losing ground against most major and emerging currencies yesterday, amid improving prospects in the US-China trade talks. The negotiations resumed yesterday in Washington after meetings last week in Beijing were assessed as “very productive” by Donald Trump. The broad assumption by spectators is that the US President is considering a 60-day extension of the March 1st deadline, however, key topics are still in the way of a happy ending. Structural changes in the Chinese economy along with a stable yuan are among the more stringent requests from the US side, which previously tip-toed around calling China a currency manipulator. As these events go on, the Federal Reserve will be today’s main character. Ahead of the last FOMC meeting minutes being released today at 19:00 GMT, cautious language is already filtering through to the speeches of Fed officials. For instance, Cleveland´s Fed President Loretta Mester signalled yesterday she would be comfortable slowing or stopping the balance sheet run-off in 2019. A more dovish than expected Fed highlights the bearish potential for a wide US dollar sell-off, while a further inversion in the US treasuries yield curve may also provide fodder for dollar-bears.
Not for the first time this week, the loonie nested itself comfortably in the middle of the G10 currency pack after no data came out and the stormy seas of crude oil price remained uncharacteristically calm as WTI crude prices closed very near to the opening rate. Domestic Canadian politics at least had an attempt of stirring up markets as Prime Minister Justin Trudeau’s principal secretary resigned, however, so far the political implications of this appear contained, limiting the impact on the loonie to the virtually non-existent.