Brexit, Brexit, Brexit - and some Fed

Market movers today

• Today's highlight is the Fed meeting tonight. We expect the target rate will remain unchanged at 2.25-2.50% and no major changes to the statement. The big question is what the Fed will signal about being 'patient'. We expect the Fed to lower its 'dot' signal to one rate hike in 2019 (down from two). We expect them also to be revised lower for 2020 and 2021 and would not be surprised if the Fed signals 'one and done'. That said, the Fed has begun downplaying the importance of the dots, so we would be careful putting too much weight on them going forward. Our current base case is two rate hikes (in June and December) based on our overall positive economic outlook, but if the Fed continues focusing on inflation expectations, a June hike seems less likely, as market-based inflation expectations are well below the historical average.

• The Brexit discussion continues to draw market attention and in particular the letter that PM May is likely to send to EU council president Tusk later today (more below). The UK CPI inflation for February is unlikely to drive the GBP.

Selected market news

Yesterday, we found out that today PM Theresa May is likely to send EU council President Tusk a letter explaining why the UK wants an extension. This letter is expected to be received today, where hopefully we will also get to know the content. According to Bloomberg , the EU is likely to say that May has to get the Brexit deal through Parliament by mid-April, otherwise the choices are a long extension into 2020 or leaving without a deal. While May's hope is that Brexiteers and DUP will back her deal in order to get Brexit going, the risk is instead prominent Brexiteers in her Cabinet will quit and Brexiteers will make life difficult for her in Parliament (and perhaps even vote for no confidence in her).

As we outlined yesterday, our base case is a long extension (60% probability versus 30% for a short extension). Yes, Brexit may be annoying and time-consuming for the EU leaders and an extension is not only for the better, but probably still better than adding a no deal Brexit to the current mix of a slower economy and high political uncertainty in other EU countries as well. We attach a 10% probability of the EU leaders not agreeing on the principles of an extension, which would be negative for markets, but we think the probability of a no deal scenario has declined. EU leaders are known to be more hawkish on Brexit than Tusk, Juncker and Barnier. One clear problem is that the EU leaders want an explanation for why to give an extension in the first place. For more details see Brexit Monitor: 60% probability of a long Brexit extension , 19 March.

The road to a ceasefire to the US-China trade war was dented yesterday, but remains on track to a solution. Senior officials were said to have reported that Trump-Xi may only meet in June and not, as recently reported, April. However, talks are still ongoing and the discussions at this final stage are difficult. Next week, the US' Lightizer and Mnuchin are travelling to Beijing and similarly, the following week China's He is going to the US in an attempt to solve the disputes, which are currently said to focus on the intellectual property rights, drug data and patents as well as the enforcement metrics.

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