05/12/2018 - Britain Could Withdraw From Brexit

GBP

Sterling jumped on Tuesday after a senior European Union legal adviser said Britain could unilaterally withdraw its Brexit notice, easing concern among investors about Britain crashing out of the bloc in March without a deal.

The advice from a European Court of Justice advocate general is non-binding but the prospect of a route out of the Brexit process cheered the market, even as Prime Minister Theresa May pressed ahead with plans for a parliamentary debate on her divorce deal with the EU.

The growing chance of averting Brexit altogether — potentially via a second referendum — has led some investors to start pricing out the prospect of a damaging “no deal” departure from the EU, analysts said, lifting sterling. May has secured an agreement with EU leaders that will see Britain leave the bloc in March next year with continued close trade ties, but the odds look stacked against her getting it through a deeply divided British parliament.

May’s spokesman said on Tuesday that the British government is not going to revoke its notice to quit the European Union.

USD

The dollar fell broadly on Tuesday as U.S. Treasury yields slipped, feeding fears that the Federal Reserve could pause in its rate-hike cycle, while an inversion in part of the yield curve was taken as a red flag for a potential recession.

The dollar, which started the week on a weak footing as a thaw in trade tensions between Washington and Beijing sapped demand for the safe-haven greenback, extended its fall as investors fretted about an inversion of the short end of the U.S. yield curve in bond markets.

The curve between U.S. three-year and five-year Treasury notes and between two-year and five-year notes inverted on Monday - the first parts of the Treasury yield curve to invert since the financial crisis, excluding very short-dated debt.

Analysts expect the two-year, 10-year yield curve - seen as a predictor of a U.S. recession - to follow suit.

While interest rate hikes have sent short-dated yields higher, inflation and slowing economic growth expectations have kept longer-dated yields pinned down.

Key Announcements

08:30 – EUR: ECB Mario Draghi Speaks