- Sterling rejoices as PM May signals potential Brexit delay
- Dollar retreats as Powell seems cautious on domestic issues too
- Canadian inflation data coming up, with oil prices also crucial for loonie
Pound explodes higher as May implicitly signals Brexit delay
The British pound was the star performer on Tuesday, gaining ground across the board to touch a new 5-month high versus the dollar after PM May watered down her Brexit stance, opening the door for an extension of the exit date. She pledged Parliament will soon vote on whether it supports a no-deal Brexit, and if there is no support for such an action, lawmakers can vote again to request an extension of Article 50 and delay the exit process.
This shift in May’s stance was likely seen as taking the threat of a no-deal exit off the table, since Parliament has made it abundantly clear it won’t sign off on such an action, effectively curbing the biggest tail risk surrounding the pound. This, at a time when the opposition leader – Jeremy Corbyn – started to throw his party’s weight behind a second referendum, which is likely the best-case outcome for sterling.
Overall, the outlook for the pound has started to brighten, though probably not enough to justify a healthy rally yet. As May herself pointed out yesterday, such an extension is a one-time trick, since getting a second one would need the UK to participate in the upcoming European elections. So, we could well be facing the same deadlock in a few months’ time, implying that lots of twists and turns likely remain before the pound gets the Brexit clarifications it needs to move higher in a sustainable and vigorous manner.
Dollar retreats as Powell highlights labor market slack, reiterates patience
The US currency pulled back yesterday alongside US Treasury yields, after Fed Chair Powell – testifying before the Senate – maintained the cautious tone he adopted lately. Besides reiterating that the Fed will likely remain of hold for a while amid global risks, he also spent a lot of time discussing labor market slack. He noted that the continued rise in the labor force participation rate is surprising, especially since it runs against long-term demographics. The implication was that the labor market may still be able to create more jobs without inflation coming into play, which diminishes the need for more rate hikes even further.
The takeaway for traders was that Powell sees both international and domestic reasons not to hike any further, which was enough to push the implied probability of a quarter-point rate cut by December to above 20%. While the message was loud and clear for both the currency and bond markets, US stocks were less certain, with the likes of the S&P 500 closing marginally lower – seemingly unable to shake off trade uncertainties.
Powell will testify today as well, this time before the House financial services Committee (17:00 GMT). Since his opening remarks will be identical, markets will focus on the subsequent Q&A session with lawmakers.
Canadian inflation figures and weekly crude inventories coming up
The key release on the economic calendar today will be the CPI figures for January out of Canada. Headline inflation is forecast to have cooled, though that may be owed mainly to the pullback in energy prices. Data aside, the bigger driver for the loonie moving forward will likely be how oil prices perform. Note that the correlation between the Canadian currency and crude prices has returned with a vengeance in recent months, after being dormant for most of 2018.
In this respect, oil prices are still reeling from President Trump’s latest verbal attack against OPEC, and the weekly EIA inventory data due today at 15:30 GMT could be the next focal point.
