A shift in UK political sentiment dominated markets during Monday and, after initial pessimism, Sterling surged later in the day as reports of Brexit progress was being made. Confirmation of beefed-up reassurances on the Withdrawal Agreement triggered a Sterling surge and Brexit hopes were also significant in protecting the Euro while both the yen and dollar lost an element of defensive demand. Markets were braced for very high Sterling volatility during Tuesday.
Pound Sterling (GBP)
Evidence of deadlocked Brexit talks kept Sterling under pressure early in trading on Monday. GBP/USD did, however, find support below 1.3000 and gradually recovered ground on reports that talks were making some headway. Sterling then pushed sharply higher after it was confirmed that Prime Minister May was travelling to Brussels. After confirmation of a breakthrough, Sterling spiked higher with GBP/USD peaking above 1.3280 while GBP/EUR hit 21-month highs near 1.1780. Sterling corrected on Tuesday amid major uncertainty whether concessions would be sufficient to secure parliamentary backing for the agreement.
Domestic Euro-zone releases were limited during Monday and tight ranges prevailed for much of the day. Low interest rates and a lack of yield support were important factors in curbing underlying yield support. The Euro did gain some support from developing optimism that there would be progress in Brexit negotiations which lessened fears over a disruptive UK exit. In this environment, EUR/USD gradually advanced to the 1.1275 area before fading to the 1.1250 area. Gains in equity markets were significant in curbing potential demand for the Swiss franc while Scandinavian currencies made headway as sentiment improved.
After a shock slump in the previous release, latest US retail sales data recorded a significant recovery for January, although the impact was limited by a downward revision to December’s dismal data. Underlying uncertainty over economic direction continued which limited dollar support with no short-term changes in interest rates likely. A firmer tone in risk conditions also curbed potential defensive US currency demand with markets taking a more positive stance on the global growth outlook. USD/JPY pushed to a peak around 111.45 as yen demand also faded while commodity currencies recovered some ground.
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