Sterling was hampered by a lack of positive political developments and caution ahead of the EU Summit despite expectations that a further Brexit extension would be approved.

US benchmark bond yields declined during Tuesday, which was an important factor hampering the dollar, although losses were concentrated against the yen.

The US currency was still protected by reservations over European currencies with little change on a trade-weighted basis.

Crude was hit by a correction after Russia indicated output was likely to be increased from June, but with solid support on dips. The Canadian dollar retreated from 2-week highs.

Equities lost ground on global trade uncertainties, but Chinese gains curbed wider losses. Precious metals secured limited gains as USD/JPY retreated.

Sterling was hampered by a lack of positive political developments and caution ahead of the EU Summit despite expectations that a further Brexit extension would be approved.

Concerns over the outlook for EU trade were eased slightly following EU Council President Tusk’s comments that talks with China had been tough, but productive and that there had been a breakthrough on subsidies. There was still caution ahead of Wednesday’s ECB policy meeting with expectations of a dovish stance, but markets wary over market volatility and short covering. The dollar recovered from lows against commodity currencies while EUR/USD settled around 1.1260 from 1.1285 highs.

Sterling moved sharply higher ahead of the New York open following rumours that the German government would propose a 5-year time limit on the Northern Ireland backstop. These reports were, however, denied quickly and gains reversed.

The currency was protected to some extent by reports that no EU state had argued to block a Brexit extension. A willingness to extend was confirmed in the draft EU statement, but exact dates would not be agreed until the Summit. There was, therefore, still an important element of caution ahead of Wednesday’s Council meeting with the risk of major tensions if Prime Minister May’s request is unconvincing and conditions are likely to be imposed. There were also concerns that no significant progress was being made in talks between the government and Labour Party and internal political tensions remained intense.

With a slightly more cautious risk tone, GBP/USD retreated below 1.3050 from 1.3120 highs and GBP/EUR declined to near 1.1555. The UK currency gained some ground in early Europe on Wednesday with GBP/EUR near 1.1600 and GBP/USD around 1.3070. Choppy trading is inevitable during the day and there will be substantial Sterling losses in the unlikely event that a Brexit extension is blocked by the EU.

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