Yesterday had the potential to be a market-moving day given the steady stream of tier-1 data releases and significant event risk, and yet major currencies – including Sterling, the Euro and Australian Dollar – have barely moved against the Dollar since late on Monday. As a result the Dollar trade-weighted index has hovered in a very narrow 0.15% range in the past four trading sessions.
Admittedly, the two central bank policy events – the ECB policy meeting and the Fed’s release of its March meeting minutes – threw up few surprises. The ECB did provide further details about its LTLRO program but ultimately reiterated its view that it was unlikely to change its policy rates this year. The Fed meeting minutes confirmed what has been known for a while, namely that the Fed is in a patient, data-dependent wait-and-see mode, with neither a rate cut nor hike likely near-term. The release of mixed US CPI-inflation data for March – headline rose to a slightly higher-than-expected 1.9% yoy while core fell 0.1pp to 2.0% yoy – seemingly did little to sway markets either way.
Perhaps more surprisingly the GBP/USD cross has remained anchored around the 1.307 level. But again the fact that the European Council was willing to compromise on the duration of a further extension to Article 50 may have left markets pondering whether the six-month extension it granted was a good or bad thing for the UK and Sterling. Prime Minister May had asked for a short 3-month extension (to 31 June 2019), French President Macron had been pushing for a shorter extension while German Chancellor Merkel and other senior officials, including European Council President Donald Tusk, had argued in favour of a longer extension of up to 12 months.
Ultimately, while the six-month extension to 31 October 2019 has bought the British government some time, it has arguably done little to increase the odds of Theresa May getting her Brexit deal, or any kind of deal for that matter, through a divided parliament. The fact that UK GDP growth was unchanged at 0.3% qoq in December 2018-February 2019 from the previous three months barely registered in FX markets as Brexit developments will likely continue to condition the UK’s medium-term path.
