With less than 40 days to go until ‘Brexit Day’, FX market nerves are getting stretched, and further volatility is expected as thin markets are exaggerating routine GBP fluctuations. Rumours, both positive and negative, are having an increased short term impact on the pound, while real political progress, if there is any, seems to be glacially slow, adding to the never ending uncertainty.
The pound struggled on the back foot for most of last week as sentiment soured after the release of lower than expected UK inflation, and very underwhelming industrial and manufacturing production data, alongside business investment also coming in much lower than forecast, though this was largely counterbalanced by the surprise rebound in retail sales data released on Friday. The economic data is however taking second stage to Brexit headlines and rumours, with PM Mays defeat in parliament seen by the markets as increasing the chances of an Article 50 extension and boosting the pound at the back end of last week.
Press reports over the weekend suggesting that France, among other European countries, are prepared to give legally binding assurances on the temporary nature of any Irish backstop have also improved pound sentiment somewhat and we have opened this week at pretty much the same levels as last week.
PM May is scheduled to meet with the EU’s Juncker and every European country leader this week, while her Brexit Minister Barclay is set to meet the EU’s Barnier, so traders will be glued to their screens for any fresh news on negotiations. May’s main issue however is closer to home, and all her efforts so far to unite Parliament behind the Withdrawal Agreement have fallen on stony ground. This, in turn, means that the EU is reluctant to offer much in the way of concessions unless they would guarantee the WA’s passing – something they are not confident that May can deliver.
On the economic data front this week, the highlights are the UK employment and earnings reports tomorrow, closely followed by the German ZEW release (this is a very influential report on confidence within German industry). On Wednesday we get the minutes from the latest US interest rate setting meeting, and markets will be looking for any guidance on the US rate path, with the recent bounce in equity markets in part due to the view that US interest rates are now firmly on hold. More European confidence reports follow on Thursday with the preliminary Purchasing Managers Index survey results and US white goods order data. We round the week off with German fourth quarter growth numbers and the EU inflation report for January, with the recent deterioration in economic data from the EU – and especially Germany – meaning these could be very influential on ECB policy going forward. Some ECB council members have recently been quoted as calling for not only a halt in the ECB’S reduction of its accommodative stance, but that further easing may be necessary, which has put pressure on the EUR recently.
As Brexit day approaches, the pound seems to be in a holding pattern, staying within a broad 1.27-1.32 range against the Dollar, with any ‘soft’ Brexit headlines/rumours resulting in the pound heading towards the upper end of that band, while anything that suggest a no-deal split is more likely sees us gravitating towards the lower end. This seems likely to continue through this week, with no real breakthroughs expected by the markets, but the closer we get to March 29th without an agreement the more likely we will see GBP coming under pressure as traders position for a disorderly Brexit. Against the EUR, the realisation that there will be no winners either side of the channel from a messy split has meant we have been in a relatively tight range now for around 18 months, staying within 1.10-1.16 on the interbank market. This range will likely break one side or the other depending on Brexit negotiations, but the scope of the move is likely to be limited to an extent by the view that it will either be good or bad news for both parties.
With the ongoing scope for continued uncertainty in the days and weeks ahead please feel free to contact me with any market questions or to discuss your currency requirements.