3 Reasons For Euro/Pound To Rise, And Where To

Euro/pound, aka the “Brexit cross”, has been remarkably stable as Brexit nears. But such limited movement does not last for to long and big breakouts usually follow.

There are three reasons to suspect this break will be to the upside.

1) Hard Brexit getting closer

The clock is ticking towards Brexit Day, March 29th, 2019. The UK insists on renegotiating the Irish Backstop, and the EU rejects it. Both parties are going in circles and markets are sure there will at least be a delay, to allow for more time.

However, there is one thing the government has rejected: eliminating the option of a hard Brexit, aka a no-deal Brexit. While a small minority of Conservative MPs support this option, they are the most vocal ones. PM Theresa May sees the Tory Party as her home and will not let it fall apart. If the hard-Brexiteers are more aggressive than the Remainers, she’ll go with the Brexiteers as she assumes the Remainers will fold.

And while her confidant Olly Robins talked about a long extension in a Brussels hotel bar, he will necessarily have her ear when push comes to shove.

Also, playing down the clock is a dangerous game with no easy escape. A hard Brexit can happen by accident. Markets will not need to wait for that to happen but may panic beforehand. The current price of GBP/USD, close to 1.2900, prices in a softer Brexit or at least a delay.

This may be too optimistic, and Sterling may have room to fall.

That’s the GBP side of EUR/GBP.

2) ECB pushback priced in

The euro-zone has been publishing weak data of late. Germany barely skipped a recession while Italy is already there. The Yellow Vest protests in France are set to weigh on its economy, and Spain faces political uncertainty once again.

However, policymakers have already responded. Senior officials at the European Central Bank have already hinted about a softer stance. The shift will likely include not only pushing back the guidance regarding the rate hike, but also perhaps another TLTRO, more money to banks.

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