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Brexit boosts pound; Draghi bounces euro

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Brexit optimism spikes sterling

By Vincent-Frédéric Mivelaz

EUR/GBP is trading at ranges not seen since May 2017 while the pound appreciated 1.60% against the USD this week. Short-term, we expect EUR/GBP to bounce back along 0.85555 while a breakthrough could well push the pair along major support at 0.84852.

Spurring the rise is UK Prime Minister Theresa May’s unveiling of three documents she says are “meaningful legal assurances” on EU side and “legally binding”, paving the way to an orderly Brexit. The government’s Attorney General Geoffrey Cox is expected to provide a thorough analysis and assess whether the content is enforceable (or not) – then Parliament will vote on it Wednesday. Her previous Brexit proposal in January was defeated by 230 votes, the largest margin in modern British history. With 17 days before the official deadline, time is getting short. Parliamentarians will also vote on 1) whether the UK will leave the EU without a deal (most likely rejected) and 2) asking for a deadline delay of a few months.

EUR/USD bounces back as investors digest Draghi’s speech

By Arnaud Masset

In reaction to European Central Bank President Mario Draghi’s dovish speech, the single currency has traded on firmer footing and erased some losses. Since last Friday, EUR/USD rose more than 0.85%, from 1.1177 to 1.1276, as investors slowly digest the new outlook for interest rates. The ECB will pause its tightening process, as will the US Federal Reserve. So what should investors focus on?

In December the Fed lowered its growth forecast for 2019 from 2.5 to 2.3%. Then yesterday the Atlanta Fed issued a fresh forecast: GDP growth for the first quarter is estimated to be only 0.2-0.5%. The European Central Bank trimmed its growth forecast for 2019 to 1.5% from 1.8%. We believe that US growth is overestimated, because the positive effect of the Trump tax cut will fade, while the cost of debt service will channel revenue away from investment and growth. We anticipate that the single currency will continue to appreciate against the buck and reach 1.15 by summer and 1.24 at yearend.

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