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From Tusk ‘til dawn, EU’ve avoided a cliff edge

From Tusk ‘til dawn, EU’ve avoided a cliff edge

GBP
Yesterday morning reports emerged that a transitional Brexit deal had been agreed which triggered significant Sterling buying. In a joint news conference, Brexit Secretary David Davis and EU chief negotiator Michel Barnier confirmed that a framework deal had been reached to run until the end of 2020 with a new backstop arrangement for the Irish border, although there is still work to be done.

Barnier stated that the EU Council will judge the state of negotiations on Friday while much of the Treaty is now agreed and that the new draft is a decisive step. This means a status quo “whole economy” transition period in which all rules on trade, people and regulation stay the same till December 2020 and Davis added that the UK would be able to ratify new trade deals during the transition with new deals active once the transition period has been completed. The deal is significant in underpinning sentiment and speculation increased that the Bank of England would move to increase interest rates in May provided an additional impetus.

Sterling broke above 1.4000 for the first time in three weeks and the Euro retreated to above 1.1430 for the first time in five weeks. There was a slight retreat from peak levels due to concerns over domestic political opposition to the deal and today’s inflation data also generating caution. Sterling opened this morning at 1.4055 against the Dollar and 1.1386 against the Euro.

USD

There was a lack of significant US developments yesterday as markets wait for an anticipated Federal Reserve policy decision tomorrow. It is widely expected that interest rates will increase by 25 bps to 1.75%.

Further, overall yield spreads moved little which hampered activity as the Dollar was hit by trade fears. At the G20 meeting of government and central banks, the US was forced to defend its national interests as reports emerged that the US was set to add up to $60bn worth of tariffs on imports from China by Friday.

The Dollar lost ground against its rivals yesterday as Cable pushed to highs of 1.4078 as the Euro strengthened to test the 1.2350 resistance area.

EUR

The Euro continues to encounter resistance as the economic data from the EU seems to disappoint. Yesterday we saw the trade surplus miss expectations by coming in at €19.9bn, versus €22.6bn forecasted.

On the flip side, the demand for the European currency accelerated slightly after news agency Reuters cited European Central Bank (ECB) members appear ‘comfortable’ with markets pricing the first rate hike at some point in 2019. The central bank is also expected to terminate its QE programme this year. However, while a new form of communication may make the Euro more volatile and lift it short-term, an ECB determined to anchor short-end rates could help keep some of the capital reversal (which could support the Euro as policy ‘normalises’) at bay if effectively executed.

Data-wise in the Euro area, the German/EMU ZEW survey will be the only release of note today.

Data to Watch:

00:30 AUD RBA Meeting’s Minutes
09:30 GBP Retail Price Index (YoY) (Feb)
09:30 GBP Retail Price Index (MoM) (Feb)
09:30 GBP Producer Price Index – Input (YoY) n.s.a (Feb)
09:30 GBP Producer Price Index – Input (MoM) n.s.a (Feb)
09:30 GBP Consumer Price Index (YoY) (Feb)
09:30 GBP Core Consumer Price Index (YoY) (Feb)
09:30 GBP Consumer Price Index (MoM) (Feb)
10:00 EUR ZEW Survey – Current Situation (Mar)
10:00 EUR ZEW Survey – Economic Sentiment (Mar)

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