Sterling Rises Slightly as EU Delays Brexit to October 31
What’s been happening?
Pound Sterling – UK Markets
The British pound recorded modest gains against its major rivals on Tuesday following the latest Brexit developments. At Wednesday’s crucial summit, EU leaders and the UK agreed to delay Brexit until October 31. European Council President Donald Tusk explained that the UK could have the Withdrawal Agreement backed by Parliament and leave the EU or revoke Article 50 and cancel Brexit during that time. In a press conference, “the choices we now face are stark and the timetable is clear” British Prime Minister Theresa May said and refused to answer if she would resign given that she made it clear in her previous statements that she would not accept an extension beyond June 30.
The UK’s Office for National Statistics on Wednesday reported manufacturing production and industrial production expanded by 0.9% and 0.6%, respectively, on a monthly basis in February with both figures surpassing analysts’ estimates. Other data from the UK revealed that the trade deficit narrowed to £4.860 billion from £5.345 billion and the economy grew by 0.2% in February to beat the market expectation for a stagnation.
“GDP growth remained modest in the latest three months. Services again drove the economy, with a continued strong performance in IT,” said Head of GDP Rob Kent-Smith in the ONS’ publication. “Manufacturing also continued to recover after weakness at the end of last year with the often-erratic pharmaceutical industry, chemicals and alcohol performing well in recent months.”
US Dollar – US Markets
The greenback struggled to make a meaningful recovery on Wednesday amid mixed macroeconomic data releases and a lack of The U.S. Bureau of Labor Statistics on Wednesday announced that the inflation, as measured by the Consumer Price Index (CPI), rose 1.9% on a yearly basis in March following February’s reading of 1.5% and came in above the experts’ forecast of 1.8%. However, the core CPI, which strips volatile food and energy prices, ticked down to 2% in the same period.
Later in the day, the FOMC’ minutes of its March meeting revealed that the majority of policymakers said the Fed’s ‘patient’ approach on rates was needed given the uncertainties surrounding the dismal global economic outlook and financial developments. “Some policymakers thought a modest hike in rates could be warranted later this year,” the FOMC said and added: “Several policymakers said the Fed's characterization of its policy as 'patient' would need to be reviewed regularly.”
Euro – European Markets
The shared currency rose slightly against the dollar and posted small losses vs the pound sterling. As expected, the European Central Bank kept the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility unchanged at 0.00%, 0.25% and -0.40%, respectively. In its policy statement, “The Governing Council expects the key ECB interest rates to remain at their present levels at least through the end of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term,” the ECB reiterated.
During the press conference, President Mario Draghi noted that they were expecting the headline inflation to continue to decline over the coming months and said that financing conditions, the labour market, and wage growth were underpinning economic expansion. Draghi also explained that the Committee unanimously wanted to deliver the message that the ECB was staying ready to adjust all instruments as necessary. Regarding the Brexit uncertainty, Draghi sounded relatively optimistic by stating that they were not expecting Brexit to have “much of an impact” in the aggregate on the real economy.
What’s coming up?
UK: There won’t be any macroeconomic data releases from the UK on Thursday.
US: Producer Price Index (PPI) and weekly jobless claims will be featured in the U.S. economic docket. Federal Reserve's Vice Chair Richard Clarida and FOMC members Bullard and Bowman will be delivering speeches later in the day.
EU: Germany’s Destatis will release the inflation report on Thursday, which is expected to show the CPI staying unchanged at 1.3% on a yearly basis in March.