The next two or three weeks remain critical for the Pound, with the UK’s political future still teetering on a knife edge. We could get more clarity on the next steps forward tomorrow, when the so-called ‘indicatives votes’ take place in parliament. This infrequently used device, which enables MPs to vote against their instructed party line, is hoped could yield a majority in favour of one or more options on how to proceed with Brexit.

Should the aforementioned indicative vote show parliament’s desire for a slightly softer Brexit, May’s deal may stand a better chance of passing. That being said, her chances remain slim. The PM is currently around 75 votes short of a majority and, even with the support of the DUP and the two dozen or so hardline ERG members, is highly unlikely to win the meaningful vote, in our view.

In such an event, we think that a longer extension to Brexit beyond 22nd May is inevitable, the confirmation of which would be supportive of the Pound. The risk to such an outcome would be the increased probability of a general election and possible resignation of May, rumours of the latter of which have been swirling around with increased regularity since the weekend.

Inverted US yield curve weighs on Dollar

The US Dollar was broadly weaker against its major peers yesterday, with fears over US growth causing investors to steer clear of the greenback.

Monday saw a so-called inversion of the US yield curve – the US 10-year government bond yield fell below its 3-month equivalent for the first time since 2007 (Figure 1). This has somewhat concerned investors, given that an inverted yield curve has historically been followed not long after by a recession. This warning sign, combined with last week’s dovish set of communications from the Federal Reserve and heightened market pricing for interest rate cuts, is likely to keep the Dollar on the back foot this week.

Figure 1: US 10Y-3M Gov. Bond Yield Spread (2018 – 2019)