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Currency markets play a waiting game

Today's news headlines:

  • 'Pound falls as PM May tries to clinch Brexit compromise’. Disappointing news from the UK construction sector overshadowed the idea that a Brexit deal may still be struck this month. The focus will now shift to today’s UK Services Purchasing Managers’ Index (PMI) reading to see if pre-Brexit softening of demand is pervasive. (Reuters)
  • 'Dollar stays near two-week high as Euro flags ahead of ECB meeting’. With the European Central Bank (ECB) under mounting pressure to address how it will protect the Eurozone from a protracted slowdown, news of stimulus measures on Thursday could be detrimental for the common currency. (Reuters)
  • 'Dollar nudges up on hopes for US-China trade deal’. Although the news is seen as positive for US growth, there’s concern that this deal may not be sufficient to stem slowing growth in emerging markets or Europe. (Reuters)

Brexit

While the balance of political progress may have to wait until next week’s key vote in parliament, yesterday’s economic data release laid bare the fact that Brexit uncertainty is strangling investment. The UK Construction PMI fell into contraction for the first time in almost a year, dragging on the Pound as a result. Attention will now be on today’s Services PMI print to see if this tells the same story. As the dominant sector in the UK’s economy, a reading below the break-even 50.0 mark has the potential to hit Sterling rather soundly.

ECB

The Eurozone economy has been showing marked signs of a slowdown since late last year. Pressure is now building on the European Central Bank to take action and deliver stimulus measures to boost the economy. Revolving around lower interest rates and or increased borrowing, such moves are generally negative for the currency involved. This expectation is already weakening the Euro, and the trend has the potential to persist, regardless of action announced by the ECB on Thursday. Stimulus measures will weigh on the common currency, but given the slowing economic data, a failure to act is unlikely to be interpreted as a sign of strength.

GBP/USD

The Pound is continuing to sell off against the US Dollar, with Brexit uncertainty and disappointing economic data giving little reason for cheer. A positive Services PMI reading today is only likely to slow any sell-off temporarily as the bigger questions over Brexit linger.

EUR/USD

Declines for the Euro against the US Dollar may be modest, but the pair has now posted four consecutive losing sessions. With speculation that a US-China trade deal will do nothing to bolster trade elsewhere and uncertainty over ECB stimulus measures, support for the common currency is thin on the ground.

GBP/EUR

Brexit optimism supporting the Pound after the weekend break was overshadowed by the disappointing Construction PMI print yesterday, leaving the cross little changed from its position at the end of last week. However, the prospect of ECB intervention over the Eurozone economy may yet be sufficient to limit further downside in the days ahead.