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With Brexit being kicked into the long grass we look at the implications for sterling. What are the key factors to consider when looking at forex, equities and commodities this week? With risk appetite improving and earnings season kicking off, the flash PMIs are key on the economic calendar in the coming days.
Trying to deliver Brexit has made the UK something of an international embarrassment. For a second time, Theresa May has been required to beg to the EU for an extension to the deadline for Article 50. The can has been kicked down the road for perhaps as long as 6 months beyond the original 29th March deadline. Whilst this “flextension” could be ended should an agreement be struck in the meantime, maybe this will bring some welcome respite for all involved in UK politics (yes, I include myself in this one, as Brexit politics has been such a dominant part of our thought process in analysing financial markets in recent months). Kicking Brexit into the long grass has allowed volatility to reduce significantly on sterling options. Both one month and 3 month Cable implied volatility has dropped sharply to levels not seen since January 2018 lows. However, for sterling, with the extension comes prolonged uncertainty. The extension does little to help the economic malaise that has caused the drag on the UK Services PMI (accounting for around 80% of the economy) into contraction territory below 50. The drag will also mean that we can all but write off any lingering prospect of a Bank of England rate hike this year. Although UK real wages look decent, around 1.5%, inflation is not a problem for the Bank of England and growth is sluggish. It will be interesting to see how markets respond to wages, inflation and retail sales data this week. Short sterling interest rate swaps do not price for a move from the Bank of England until well into 2020.
