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Pound on back foot as traders eye a short extension

By Alex Edwards

The pound has fallen this morning as investors foresee a short Brexit extension. There are also doubts as to whether there will still be a vote on May’s deal before the end of the month unless the PM is confident she can get either the DUP or ERG on side, or both. The feeling is that should May’s deal not get approved, a short extension makes for more scrambling within Government and a more intense state of confusion, with the alternatives being an extension to 2020 or a no-deal.

In other news yesterday UK employment numbers and average earnings printed positively above market expectations, albeit the reaction of the pound was muted as attentions remain firmly affixed on Brexit developments. The headline numbers are positive nonetheless and did at least serve to support the quid through the European morning session.

Other than Brexit developments, traders will now be looking to UK inflation data this morning and the FOMC rate decision and presser this evening, so all in all it could be a volatile period for GBP/USD.

The dollar has been steady so far this week in the run up to the much anticipated FOMC monetary policy announcement and press conference. Expectations are that the central bank will underline the fact they’ll remain patient, and in so doing leave rates on hold. Some are suggesting they may take more of a dovish stance this time around, which will be dollar negative, albeit economic data has stabilised since January.

The euro pushed higher on Tuesday on the back of positive German data; the ZEW Indicator of Economic Sentiment for Germany recorded a strong increase of 9.8 points in March 2019, with the corresponding indicator climbing to a level of minus 3.6 points. Although the indicator is still below the long-term average of 22.2 points, expectations for medium-term economic growth are now less pessimistic than they were a month or two ago. However, the assessment of the current economic situation in Germany decreased again in March, falling by 3.9 points to a reading of 11.1 points compared to the previous month.

EUR/USD has settled lower since the ZEW print and opens this morning at 1.1340, with traders now eyeing the FOMC tonight.

The Australian dollar edged lower through trade on Tuesday, giving up 0.71 US cents. Having edged higher through the last 7 days AUD/USD has struggled to extend gains beyond 0.71 as market movements remain largely muted. It fell further overnight following comments from RBA Assistant Governor Bullock; she said she had some concerns about the stability of the housing sector, particularly the apartments market in Sydney.

Attentions now turn to the US Federal Reserve Policy Meeting this evening for immediate short-term direction. A string of softer US data sets have supported the Fed’s recent dovish shift and markets will be keenly attuned to any rhetoric that hints to a significant extension of the current patient platform.

It was a volatile session for the CAD yesterday. USD/CAD fell to 1.3250 but then rebounded to 1.33 and over by the end of the day, reflective of the move in oil prices on the day.

On the release front yesterday, all eyes were on the budget release. The keys points from it were that they are assuming 1.8% real GDP growth in 2019, 3.4% nominal GDP growth in 2019. Looking ahead for next year assumes 1.6% real GDP growth in 2020, 3.5% nominal GDP growth in 2020. In the meantime, the CAD has weakened further overnight and USD/CAD opens in London at 1.3335.

NZD/USD is weaker this morning, this on the back of comments by the RBA Assistant Governor – see above. Traders are also perhaps a little wary of NZ GDP data due later tonight. As well as the FOMC this will get most of the attention.