Post date: 21/10/2019 09:30
Politics drove currency markets last week, as positive Brexit news buoyed Sterling and other European currencies rose on the Pound’s wake. The pound gave up some of its gains on Asian trading Sunday night, but clearly markets think the risk of no-deal Brexit is now materially lower and an agreement that can pass Parliament is at least possible. Away from the Pound, the dollar sell off continued last week. On a trade-weighted basis, the greenback is now below where it started the year. In line with our views, it is emerging market currencies whose rebound from oversold levels is leading the way.
This week the focus should remain squarely on Brexit developments, though any US-China headlines will also impact sentiment. The ECB meeting and Eurozone PMI indices of business activities out Thursday are the policy and macro highlights of the week, respectively.
The new Withdrawal Agreement negotiated by Boris Johnson’s government did not get an up-or-down vote in Parliament over the weekend. Instead, lawmakers forced Johnson to request an extension. As this is written, it appears that the EU is ready to grant a requested three-month extension if the deal does not secure Parliamentary approval next week. We stick to our view that an extension followed by a general election is the most likely outcome, and the possibility of a second referendum with Remain as one of the options cannot be ruled out.
With little important data out of the Eurozone, the common currency traded off of Sterling and the dollar in response to both Brexit developments and the increasing sense of optimism around a US-China trade deal. The Euro has rebounded unambiguously from its early October lows and is not far from the middle of its three-year range against the dollar. The PMI indices remain the most important data point out of the Eurozone, and it is quite possible that Brexit optimism among business managers will drive a positive surprise. We expect little news out of Draghi’s last ECB meeting next week, before the baton passes on to Christine Lagarde.
Dollar weakness continues to be driven by a combination of investor optimism and risk-seeking worldwide. Last week, weak retail sales numbers also contributed to dollar bearishness. A raft of second-tier data also came out on the weak side. There is not much critical data on tapo for this week, so we expect the dollar to continue trading off news elsewhere, particularly Europe and Brexit.