Cross-party talks between Prime Minister May and opposition leader Jeremy Corbyn are ongoing in an effort to break the impasse in Parliament. This represents a last-ditch attempt to find a solution. However, it remains to be seen whether any common ground can be found. Even if there is no agreement between May and Corbyn, she has promised that MPs will be able to vote on various options on the future EU relationship. Those options are yet to be specified but could include a resurrection of Mrs May’s current proposals as well as softer Brexit options.
The settlement could pivot towards closer a future EU relationship (a ‘softer’ Brexit), but would still have to include the Withdrawal Agreement (the divorce) already agreed with the EU. Despite the fact that domestic negotiations are ongoing, Mrs May will attend the emergency EU summit on Wednesday in Brussels. A further extension to the Brexit date is expected to be granted. It will require the unanimous approval of the other EU-27 countries, which is not guaranteed. Without that, the UK would leave the EU with ‘no deal’ on 12th April. PM May asked for an extension to 30th June, but her preference is still to leave the bloc on 22nd May to avoid taking part in European elections.
UK data continues to take a backseat to the political situation, though the February GDP numbers are worth watching. January was surprisingly strong with GDP increasing by 0.5% for the month. Markets expect February to be flat which would keep the three-month growth rate around 0.2%. Releases for manufacturing, construction and services activity will also be watched for activity levels on Wednesday.
GBPEUR – 1.1633
GBPUSD – 1.3059
Eurozone data headlines remain downbeat. The manufacturing PMI was revised down to 47.5, with the German index at only 44.1. Domestic activity indicators have held up better, and there are no clear indications yet that the Eurozone economy as a whole is entering a recession. The ECB policy meeting on Wednesday will see officials discussing downside risks but also puzzling over the weakness of domestic inflation pressures despite the pickup in wage growth.
We don’t expect any significant further detail at this week’s ECB meeting. In March, the ECB downgraded its growth forecasts, pushed out its signal for the earliest first rate hike to 2020 and announced new long-term loans to banks. Instead, President Draghi is likely to be quizzed on recent remarks he made on “mitigating the side effects” of negative interest rates. That has led to speculation of a tiering of interest rates for banks’ excess reserves held at the ECB, but it could also be a reference to the new lending programme.
Meanwhile, all eyes will be on the Emergency EU summit on Wednesday, to determine whether a delay will be agreed and if so, under what terms.
EURUSD – 1.1226
EURGBP – 0.8596
With the focus on UK events, it’s easy to overlook the importance of global economic developments. Global equities have rallied by more than 10% since the start of the year. That has coincided with significant declines in bond yields, as the US Federal Reserve and other major central banks move towards a more dovish policy stance. The US and China appear to be moving closer to a trade agreement, which is also supporting risk sentiment.
There was tentative evidence last week that global economic activity may be stabilising. China’s official manufacturing PMI rebounded strongly to 50.5 in March from 49.2, while the US manufacturing ISM rose to 55.3. Further, US non-farm payrolls increased by nearly 200,000 after a weak 33,000 last month.
US data focus this week will be on the March CPI on Wednesday. We expect headline CPI to rise to 1.8% from 1.5%, but core inflation is forecast to stay at 2.1%. Underlying inflation remains at historically benign levels. The minutes of the March FOMC meeting will reaffirm that interest rates will be kept on hold for now. Other key US releases include durable goods orders, PPI and the University of Michigan consumer sentiment survey.
GBPUSD – 1.3059
EURUSD – 1.1226
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*Interbank rates correct as at 7 am on the date of publishing