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Pound Under Pressure as May Requests Article 50 Extension

GBP/USD has posted slight losses in the Thursday session. In North American trade, the pair is trading at 1.3165, down 0.22% on the day. On the release front, British retail sales posted a gain of 0.4% in February, compared to a strong gain of 1.0% in January. The U.K. recorded a small budget of GBP 0.7 billion, beating the estimate. There were no surprises from the Bank of England, which left rates pegged at 0.75% for a sixth successive month.

The Brexit saga shifts to Brussels on Thursday, as Prime Minister May will officially request an extension to Article 50 at a meeting of E.U. leaders. May is looking for a 3-month extension, but the Europeans may prefer a longer delay. In any event, all 27 members of the EU must approve any delay to Brexit, which is scheduled for March 29. Parliament will vote on the withdrawal deal again next week, and French Prime Minister Macron said on Thursday that if the deal is voted down, the U.K. will leave without an agreement. With no end in sight to the confusion and uncertaintly, we could see strong swings from the pond in the coming days.

The markets were prepared for a dovish Fed rate statement on Wednesday, but the tone of the statement and the pessimistic rate outlook caught investors off guard. The Fed’s rate outlook (dot plot), which is released each quarter, showed that a majority of FOMC members expect no rate hikes in 2019. This was in sharp contrast to the previous quarter’s forecast, in which the FOMC projected two hikes this year.

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The rate statement was markedly dovish, stating that economic activity “has slowed”. Policy makers singled out slower growth in household spending and business investment and noted that inflation has decreased due to lower energy prices. The Fed also announced that it would stop reducing its balance sheet by $50 billion a month. This move is a loosening of policy and is intended to stimulate the economy. The new Fed forecast projects GDP growth of 2.1%, down from 2.3% in December.

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