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Week Ahead: Sterling and Euro are Major Volatility Risks Ahead

Market Analysis - | 01 Apr 2019

Sterling – Brexit yet again the big issue for the Pound

The main event in the week ahead for Pound Sterling will be the opening of a new chapter in the Brexit saga, with markets now focused on April 12 as the new deadline by which the UK's withdrawal must be formally agreed.

Prime Minister Theresa May now faces as choice between pursuing a so-called no deal Brexit, and requesting from the EU another extension of the Article 50 negotiating window that will almost certainly require participation in the EU parliament elections.

There is still no one path ahead that can command a majority in the House of Commons, although MPs who've been attempting to seize control of the Brexit process from the government will get another chance on Monday to force the government into pursuing a future relationship model they find more palatable.

Some of the ideas put forward by members of parliament include a "permanent customs union", the revocation of Article 50 and another referendum among others. All of those options are likely to meet fierce resistance from the minority of Brexit-supporters in parliament, while also being electorally controversial.

There is also a possibility Theresa May could try to hold a fourth vote on her withdrawal agreement although it remains to be seen whether or not she can win it.

Apart from Brexit drama, the March IHS Markit PMI surveys will also be released, although they are unlikely to have much impact on Sterling given the market's unrelenting focus on Brexit.

Euro – Macro data returns with a bang

It’s a busy week on the macroeconomic front for the Euro this week. The main release is inflation data, out at 10:00 am on Monday. Consensus is for inflation of 1.5% in March, unchanged from in February. Core Inflation, which leaves out volatile fuel, food alcohol, and tobacco components, is expected to slip to 0.9% from 1.0% in February. Inflation is important for the Euro because it informs central bank policy on interest rates and this influences the currency.

Mario Draghi, the president of the European Central Bank, said in a speech last week he expects the ECB to keep interest rates low for some time yet because inflation is already too low and now the economy is slowing. Inflation is a function of demand so when the economy slows, price pressures tend to weaken.

The release of the minutes of the March ECB policy meeting, out at 12.30 GMT, on Thursday, will be another key moment in the week ahead. This will reveal the deliberations of the governing council during the last meeting and could be useful as a gauge of what they may do next. The risk is that growth concerns become so acute that they pivot policy towards increasing accommodation and completely write off raising interest rates for the time being. The unemployment rate has been one of the bright spots of Eurozone data and it is expected to show a 7.8% rise in the week before - the same as the previous result. There is a risk it could be better-than-expected which would support the Euro.

Retail sales data for February is out on Wednesday and is expected to show a 0.2% rise compared to 1.3% previously on a month-on-month basis and a 2.0% from 2.2% rise on a year-on-year basis. Retail sales is a major contributor to overall GDP so if the data is better-than-forecast it could support the Euro and vice versa if it is worse.

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