Theresa May lost ground in Brussels last night after fellow EU leaders pushed back against requests for fresh concessions over Brexit. Sterling proved to be resilient in light of the news with only modest losses being recorded as markets assessed where to move next. However, the message from Brussels was clear: the EU demanded that London lays out what it wants from the deal, rather than fishing for the options which may be on offer. Once again, UK political risk appears to have been elevated, although the absence of overt GBP selling pressures does once again suggest that the downside may have run its course—at least for now.
The European Central Bank (ECB) acted as had been widely predicted yesterday in terminating the bond-buying scheme it has been running for some years. However, the accompanying press conference included several caveats including reference to the fact recent data releases had been weaker than expected, and that policy stimulus was still necessary to stoke inflation in the medium term. The common currency lost some ground as a result, although downside pressures were arguably limited in light of this news.
Eurozone Purchasing Managers’ Indexes (PMI) from Markit at 8.30am GMT have the potential to provide some fresh direction for the common currency. Despite the cautious notes accompanying yesterday’s ECB statement, some modest expansion is expected. Failure to see this delivered will have the potential to increase downside pressure on the Euro as a result.
US Retail Sales figures for November are also on the slate at 1.30pm GMT. Given the ongoing debate as to whether the Federal Open Market Committee (FOMC) will be able to push through a fourth rate hike for 2018 next week, this number could prove key. Ultimately the Federal Reserve’s mandate is to manage inflationary pressures, and there are expectations that a sharp decline could be seen in today’s print. If this dips into negative territory, there could be some fresh downside pressures on the US Dollar, especially in light of yesterday’s DXY appreciation.
Looking into next week, UK inflation data is on the calendar for Tuesday. However, this seems unlikely to be able to provide any meaningful direction for the Pound which will continue to be driven by the Brexit debate. After last night’s fresh humiliation in Brussels, any suggestion that Theresa May is questioning her own ability to engineer a way forward from this gridlock may actually have the potential to boost Sterling.
There has been some notable selling of the Pound in early European trade following last night’s new impasse. Scope for further selling does seem to be limited from here.
The Euro is also struggling against the Dollar early in Friday’s European session, although mounting concerns over global trade, as opposed to Brexit read across, appears to be driving this move. Upbeat PMI data could help reverse this situation.
Sterling may have given back some of yesterday’s gains over the Euro, but the signal from the ECB that it won’t be rushing headlong into further policy tightening has arguably provided a degree of support. Again, despite the headwinds for the Pound and UK political risk, the potential downside may be close to being fully priced in now.