Brexit Bargaining Begins

Sterling trades close to its highest levels this month as the labour market remains tight and optimism grows ahead of today’s crunch UK-EU talks.

Previous Day's Market Highlights

Sterling outperformed on Tuesday, gaining over 1% against the dollar and 0.8% against the euro, to trade near to its highest levels this month. The rally came as data showed the UK’s labour market continuing to perform well in January and as optimism grew over the ongoing Brexit negotiations. The pound broke through the key resistance levels of $1.30 and €1.15 after average earnings continued to increase at 3.4% and unemployment held steady at 4% in the final month of last year. Despite falling slightly short of expectations, the report showed once again that the UK’s labour market is tightening and that there is scope for interest rate increases from the Bank of England post-Brexit. Sterling has gained more than 2% against the dollar in the last 3 days.
 
The pound’s rally was helped by a significantly weaker dollar, with the dollar index losing 0.5% in the afternoon session to trade at its weakest level since 8th February as US trading desks reopened after yesterday’s public holiday. The greenback was not helped by relatively dovish comments from the Fed’s Mester, a typically hawkish member, who indicated that she would be comfortable to stop the balance sheet run-off this year. Elsewhere, economic sentiment figures from Germany rose to their highest level since September 18, but remained in pessimistic territory, while the Swedish krona lost almost 1% as January’s inflation reading vastly missed forecasts – with CPI falling to 2%, the lowest level since March last year.
 
Other major currencies also strengthened against the dollar, with the euro, Swiss franc and Aussie dollar all gaining more than 0.3%. The single currency shrugged off cautious comments from ECB officials as well as a narrowing of the bloc’s trade surplus. The latter data point fell to a 2-year low, providing markets with a further example of trade tensions weighing on the global economy. The Aussie dollar pared overnight losses after the RBA minutes while the Swiss franc remained supported as risk appetite improved.
 
Away from FX, European equity markets lost ground, with the pan-European Stoxx 600 losing 0.2%, dragged down by banking stocks. Meanwhile, US markets recorded modest gains, with the S&P 500 adding just shy of 0.2%. Finally, oil prices traded close to their highest levels of the year, with WTI adding around 0.9%, as OPEC-led supply cuts continued to tighten the market

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1496 1.1604 1.1312 2.52%
GBP/USD 1.3037 1.3218 1.2773 3.37%
EUR/USD 1.1340 1.1514 1.1233 2.44%
GBP/AUD 1.8205 1.8522 1.7844 3.66%
GBP/NZD 1.8995 1.9426 1.8701 3.73%
GBP/CAD 1.7191 1.7498 1.6960 3.07%

Today's Market Highlights

Investors’ primary focus today will lie with this evening’s release of minutes from the latest Federal Reserve meeting. Though interest rates were kept on hold last month, the FOMC made a sharp shift away from their tightening bias, instead pivoting to a more neutral stance and expressing “patience” with the pace of further policy monetary policy tightening. With markets taking this as a sign that the Fed have hit pause on further rate increases for now, any comments explaining the rationale of such a decision are sure to attract significant attention. In addition, markets are likely to keep a close eye on how patient the Fed will be before their next policy move as well as any comments relating to the pace and timing of the balance sheet run-off – the process of reversing crisis-era quantitative easing.

The pound is likely to take its next direction from this afternoon’s meeting between Prime Minister May and EU Commission President Juncker, with the two leaders continuing to find a way of breaking the impasse in the Brexit negotiations. While the EU continue to reiterate that the Withdrawal Agreement is not up for renegotiation, the Prime Minister hopes to amend the Irish backstop arrangement before bringing the deal back to Parliament for a second meaningful vote. Such a vote could come as early as next week, before MPs plan to vote on their preferred way forward on February 27. 
 
Elsewhere, other data is of lower tier and unlikely to spark significant volatility including consumer confidence figures from the eurozone and the UK’s CBI industrial trends survey. Finally, a few central bank speakers are slated with markets due to hear from the ECB’s Praet and the Fed’s Kaplan and Bullard.

Today's Economic Calendar

Time Currency Release Consensus Previous
11:00am GBP CBI Industrial Survey - Orders (m/m) -3 -1
3:00pm EUR Preliminary Consumer Confidence -7.8 -7.9
5:30pm GBP PM May Meeting With EU Commission President Juncker
7:00pm USD FOMC Meeting Minutes