Sterling again dominated global markets with a reversal of Monday’s gains as expectations of a government Brexit vote victory rapidly reversed, although there was only limited further selling after the parliamentary defeat was confirmed. The benign US inflation data curbed potential dollar demand and expectations of dovish policies by the Federal Reserve also helped protect the Euro. Global growth concerns persisted and commodity currencies retreated from their best levels.
Pound Sterling (GBP)
UK data releases were stronger than expected, although there was little impact as political considerations dominated. Sterling fell very sharply during European trading following the publication of Attorney General Cox’s legal advice which stated that there was still a risk of being trapped in the backstop. Volatility was the main feature later in the day and the UK currency maintained net losses as the House of Commons rejected the Brexit deal by 149 votes. GBP/USD did recover from daily lows and regained 1.3100 amid expectations that parliament would reject ‘no-deal’ in Wednesday’s vote with GBP/EUR above 1.1600.
The Euro was hampered to some extent by disappointment over Brexit developments as markets quickly shifted to expecting that the UK Brexit deal would be rejected. German yields also declined on the day, although US yields declined further which helped protect the Euro. There was also further evidence of structural Euro buying given the very strong current account position as other major currencies failed to convince markets. Overall, EUR/USD gradually advanced to around 1.1300, without being able to hold above this level and narrow ranges prevailed on Wednesday with EUR/USD trading around 1.1285.
The headline US consumer inflation rate declined to 1.5% for February from 1.6% previously, slightly below expectations and the weakest rate for over two years while the core rate held at 2.1%. The data maintained expectations that the Federal Reserve would be patient and not increase interest rates in the short term. US benchmark yields moved to 10-week lows which was an important factor in curbing dollar demand and the currency drifted lower. The yen lost support as global equity markets advanced, although there was a more cautious tone on Wednesday as global growth concerns persisted with USD/JPY around 111.30.
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