Brussels gets flexible

April 11, 2019

GBP

Another 6-months is scheduled in the Brexit timetable with a review period in June. The new deadline, which sits on Halloween’s October 31st, was a hard-fought compromise between EU leaders which were split between allowing no extension and a longer year-long extension. President Donald Tusk urges Brits to not waste this time in his speech last night while reiterating the Withdrawal Agreement was not up for renegotiation. The Withdrawal Agreement includes the contentious Irish backdrop. Tusk also outlined the flexibility the extension provides, stating that the extension will be null and void should Parliament ratify May’s current Withdrawal Agreement as the process would then enter into the 21-month transition window. The political declaration still remains up for discussion, with no future framework with the EU casting a majority in the Commons. The 6-month extension is arguably too short to see a second referendum or a potential general election, ruling out some tail risk for the pound, but the question remains if the UK economy can resist the pressures of sustained Brexit uncertainty. Today, May will address MPs on the progress of last night’s EU27 meeting.

EUR

The single currency was in for a wild rollercoaster ride yesterday as the single currency quickly pared losses after the European Central Bank press conference in the afternoon. The evening then brought a fresh bout of volatility after the US Federal Open Market Meeting Minutes. ECB President wasn’t attempting a brag when he repeatedly stressed the ECB has plenty of tools, and definitely every tool it needs in its monetary arsenal to achieve its goals. More likely he was responding to the rising internal as well as external risks for the Eurozone economy and how the ECB can respond to this. As the structure and timing of potential rate hikes were left virtually undiscussed, it clearly demonstrates the ECB currently is more focused on the downside than to the upside risks for Eurozone monetary policy. After the German and French Final March Consumer Price Index both came in exactly on target at 0.4% and 0.8% respectively, the data calendar remains blanc for the rest of the day.

USD

Dovish FOMC Meeting Minutes and a softer Core CPI reading were too much for USD to stomach and the greenback fell for the third day in a row. Headline inflation increased by 0.4% in March, however, Core CPI underwhelmed the 0.2% month on month expectation and trend by only increasing by 0.1%. Details of the reading show us that a change in the methodology of measuring apparel prices led to a one-time drop of 1.9% on this element, while the real story in the report may actually be the change in rents. Primary rents jumped well-above trend and at their highest level since February 2007, which is consistent with the 34-year vacancy low and the faster wage growth. For us, this implies we may well see a rebound in core inflation next month. Meanwhile, the FOMC Meeting Minutes showed policymakers continue to face significant uncertainties, from a slowdown in Europe and China, to cooling inflation pressures. Today sees the Producer Price Index as the most important data release, with four FOMC members speaking spread out over the day.

CAD

The US Department of Energy report showed that crude inventories continued to build last week, with the figure coming in at around 7.029m. This did little to shake the loonie which closed marginally higher against a weakening US dollar. Oil prices remain elevated, despite the inventory data evidencing increased production in the US, but WTI prices may not crack $65 just yet as production from OPEC+ shows signs of rising again.

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