Sterling trades flat after EU leaders extend Brexit deadline

The dollar and euro were little changed on Thursday after the Federal Reserve and the European Central Bank hinted they were willing to leave interest rates alone amid trade tensions and signs of flagging growth. Sterling traded flat after European Union leaders extended the deadline for Britain to leave the EU, suggesting fears remain about where Brexit is headed.

Currency markets are waiting for key economic data from China: trade figures due on Friday and first-quarter gross domestic product due next week. The Fed on Wednesday released the minutes on its March 19-20 meeting at which policy-makers signaled they would not raise rates in 2019. ECB President Mario Draghi underscored the risks facing the euro zone economy, reinforcing bets on further stimulus to prevent the region from slipping into recession. Investors are focused on where the pound is headed after another delay to Brexit.

The advantages for sterling, as well as UK and European equities, include the removal of a near-term, no-deal Brexit. But that is offset by the prospects of UK Prime Minister Theresa May's replacement, a general election and the threat to the UK economy of prolonged uncertainty. As a result, no conviction bets emerged on the pound and it remains stuck just below $1.31. "The extension is unlikely to improve business confidence much, thus limiting the upside to GBP," said Chris Turner, head of foreign exchange strategy at ING. "The rising probability of a change in Conservative Party leadership ahead of the new October deadline suggests a difficulty for EUR/GBP to move below the 0.85 pence level," he said.

Concern about big swings in the pound have subsided, according to one-month implied volatility, which fell to a seven-month low. The dollar index last stood at 96.95, flat on the day, after slipping to a two-week low of 96.823 on Wednesday. The euro last held at $1.1278, recovering from Wednesday's low of $1.12295, keeping intact its slow rise from $1.1183 on April 2. Commodity currencies including the Aussie were also helped by recent gains in commodity prices. 

(With inputs from agencies.)