GBP: A delay and only a delay
Barring the European Union declining to offer the U.K. an extension or offering one on terms that the U.K. is unable to accept, the U.K. will not be leaving the EU in a fortnight’s time. MPs voted last night to ask the EU for an extension and that will likely come at the meeting of EU ministers next Thursday and Friday. ‘Hell Week’ may be over, but we remain in purgatory.
Of course, this doesn’t solve the fact that we still need a deal or a revocation of Article 50 to make any progress. A delay is a delay and only a delay. To that point, we expect that the Prime Minister will once again put her deal to Parliament for a meaningful vote – possibly the most meaningful – next Tuesday or Wednesday. If that passes, then an extension of a few weeks may be necessary. If that fails then a longer extension – maybe over 12 months – could easily be proposed by the European Union.
In my opinion, it’s becoming clear that we are on one of two paths with Brexit now.
1) We see another vote on Theresa May’s deal next week. The vote passes the House of Commons and Theresa May goes to the European Union asking for an extension until the European elections on May 23. The U.K. leaves the EU with a deal albeit a little later than March 29.
2) We see another vote on Theresa May’s deal next week. The vote loses in the House of Commons and she will go to Brussels to ask for a long extension, making it clear that the U.K. now needs to rethink its entire approach to Brexit. This may take place with a new PM in charge.
Such a long extension would either require an election or a second referendum according to the European Union. In my opinion, an election would be needed with parties advocating a second vote as part of their manifesto for a second referendum before there is enough of a majority in parliament, as seen in last night’s defeat of a People’s Vote amendment.
How does sterling trade in all of this? A longer extension is a positive in the short term – size does matter – but obviously raises electoral risk and the possibility that Jeremy Corbyn enters Downing Street which has been the second most common concern for the pound, after a no-deal outcome.
If I had to call it now, any extension over six months could see a run in GBP/USD up to 1.38 with GBP/EUR tracking to 1.20 although that may prove to be unsustainable in the longer term.
JPY: Rates held, risks remain
As expected, the Bank of Japan left monetary policy unchanged overnight and, in its statement, downgraded its overall view on the economy. The press conference will allow us to parse the Bank’s tone on stronger inflation versus a weaker growth and trade outlook.
The wider market risk remains heightened – Chinese data has been poor, and while Brexit is a U.K./EU issue it has global consequences – so we are unsure as to just how weak the JPY could trade even on a poor outlook from the Bank of Japan.
USD: Weakness to be factored in
U.S. industrial and manufacturing production figures are due and, while the manufacturing picture is a lot worse in Germany and China than it is in the U.S., this figure merits closer inspection given the risks that additional trade barriers and tariffs hold over the industry.
Despite President Trump saying the U.S./China trade talks are going “really well”, he and Chinese President Xi will not meet this month.