Sterling surges as investors back imminent Brexit agreement

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21 September 2018

thomasdodds

Attention in the currency markets remained firmly on Brexit yesterday, with comments from European Union leaders’ further raising hopes that a deal between the UK and EU will be struck in either October or November.

T
here was growing optimism over progress in negotiations following Thursday’s informal EU summit in Austria, although concerns over the Irish border remain and Theresa May warned that a ‘no deal’ scenario remains a possibility. EU council head Donald Tusk also issued a warning to the UK government, stating that the UK’s proposed economic partnership ‘will not work’. Regardless, currency markets appear positive that a deal can be done, with investors pushing Sterling around one percent higher to its strongest position against the US Dollar since early July.

Earlier in the day, the latest UK retail sales provided additional assistance for Sterling after the data massively exceeded expectations. August sales grew at a healthy 3.3% year-on-year, significantly above the 2.3% consensus. This was fuelled in part by a jump in furniture and lighting sales, which raises hopes of a bounce back in overall economic activity in the UK in the third quarter of the year. As was the case following yesterday’s impressive inflation numbers, we think that this reaffirms our call for another Bank of England interest rate hike in the second quarter of next year, providing we see an agreement on Brexit.

Trade concerns ease, investors eye Eurozone PMIs

An improvement in sentiment towards Brexit helped EUR/USD on its way, with the currency pair also propped up by easing concerns over global trade. The Euro rose by almost three-quarters of a percent during the London trading session yesterday, with relief that the US and Chinese trade tariffs were less harsh than anticipated, leading to renewed appetite for risk.

With another interest rate hike from the Federal Reserve this month now entirely priced in, there appears little enthusiasm among traders to push the US Dollar any higher ahead of next week’s FOMC meeting. With another hike in December now also more than 70% priced in, we think we may soon be approaching the stage where gains for the greenback are becoming harder to sustain.

Next up will be the release of this morning’s preliminary manufacturing and services PMI data for the Eurozone, widely seen as one of the most significant economic data releases in the bloc. We think that a positive surprise here could bring forward expectations for the first interest rate hike by the European Central Bank since 2011. Financial markets are now just about pricing in a hike in the final quarter of 2019 following last week’s relatively hawkish ECB meeting