FX round-up: Traders cautious ahead of PM's announcement, analysts divided

On 21 January, the Prime Minister will lay-out her alternate plan for Brexit, following Parliament's rejection of her Plan A last week, even as she comes under pressure from all sides, with some observers calling for her to show more flexibility on her red lines in order to help see-off the risk of a no-deal outcome.

With an extension of Article 50 increasingly likely, how much ground each side concedes over the coming week may help clarify for just how long such an extension may run, said analysts at Barclays Research.

"A potential game changer could be an extension of Article 50 negotiations beyond six months. Moving the 'ticking clock' would allow a materially wider range of outcomes, including a no-Brexit scenario," they added in a research note sent to clients.

Against that backdrop, the pound gave up 0.63% against the single currency on Friday to end the session at 1.1330, while against the Greenback it surrendered 0.88%, finishing at 1.2872.

The pound had staged a strong bounce on both crosses over the preceding week, closing in on six-month highs.

Strategists at the likes of Rabobank or Bank of America-Merrill Lynch were expecting further gains in the pound.

But at least some well-known City-based traders were more cautious.

"Currency markets still appear to be taking a positive view on all of the political turmoil coming out of the UK parliament as the pound continues to edge higher against the euro," said Michael Hewson at CMC Markets UK.

"Increasing talk around the prospect of an article 50 extension and a second vote appears to be encouraging some short covering, though for the most part the move higher appears to be more in hope than expectation, given the default position as it stands now remains that the UK leaves the EU without a deal."

For their part, at Rabobank the central view was that euro/pound would slip towards 0.87 over the next three months - assuming a 'hard Brexit' was avoided.

Meanwhile, over at BofA-ML, the house view was that: "Defeat for Government was largely anticipated and GBP fallout should be contained as PM is safe from a leadership contest."

BofA-ML's projections called for 'cable' to reach 1.38 over the course of the first quarter of 2019 and 1.45 in quarter four.

"Parliament likely to take more control on Brexit to avoid a no-deal. We stick to our call that UK is headed to a soft Brexit. Scope for sizeable GBP appreciation once political risk premium priced out," BofA-ML added.

In the background meanwhile, and ahead of the long holiday weekend in the States, the US dollar spot index added 0.28% to 96.3360.

Triggering buying in the US dollar, late in the afternoon session in London, Bloomberg reported that during the first round of talks with Washington in early January, Beijing had offered to embark on a six-year $1.0trn buying spree of US goods in a bid to reconfigure the trade relationship between the two economic giants and reduce its trade surplus with America to zero by 2024.

That saw euro/dollar drop -0.23% to 1.1363, with traders on that cross likely already eyeing the European Central Bank's policy decision on the following Thursday, where a more cautious stance was anticipated.

As well, in its quarterly economic bulletin, Italy's central bank cut its forecasts for the rate of growth in the country's GDP in 2019 and 2020, from 1.0% and 1.1% to 0.6% and 0.9%, respectively, signalling that Italy may have fallen into recession at the end of 2018.

Dollar/yen meanwhile added 0.48% to 109.78.