Brexit disarray prevails, but Pound still finds buyers

Today's news headlines:

  • 'Sterling jumps on strong UK jobs data’. Growth in UK wages hit a 10-year high yesterday and combined with the belief that a no-deal Brexit can be avoided,  helped to drive the Pound noticeably higher. (Reuters)
  • 'US cancels trade planning meeting with China, source says’. Outstanding disagreements over intellectual property rules see the talks cancelled as the next tariff increase on March 1st nears, although the White House continues to plan for high-level meetings with China at the end of this month. (CNBC)
  • 'Brussels and Dublin at odds over N Ireland hard border’. Tensions among EU member states over avoiding a no-deal Brexit are mounting as sentiment builds that such an outcome will be damaging for the Eurozone as well as the UK. Suggestions are that if Dublin makes the first move, concessions over the backstop could be forthcoming. (Financial Times)

There’s no escaping from the political deadlock in Westminster with Theresa May still refusing to rule out the possibility of a no-deal Brexit. However, given the mounting opposition from politicians, including many in her own party, markets believe the chances of the UK having a disorderly exit from the EU are diminishing. Fractures are now emerging among other European member states over the best possible solution to Brexit. This development also has the potential to tease out concessions which would allow Theresa May to push through the Brexit bill. Add to this the better-than-expected employment data released yesterday which saw the Average Weekly Earnings figure rise ahead of inflation at 3.4%, and it’s perhaps no surprise that the Pound has been finding broad-based support. Maintaining these gains could prove challenging in the short-term given the incredibly volatile political backdrop.

There’s little sign of any progress being made with the US-China trade talks, with the news that a pre-planning meeting had been cancelled. This added weight to the idea that this matter won’t be resolved before the March 1st deadline. The two sides remain a significant way apart, and the dispute is already taking a toll on the wider global economy. On the basis that this situation seems likely to worsen in the months ahead, questions will be asked once again over where the US Dollar can go next. Still, the Greenback continues to find safe-haven support, with disappointing trade figures from Japan overnight adding further weight to this conviction. Although political paralysis at home and the international trade situation could start to heap pressure on the US Dollar in the medium-term, inflationary pressures still need to be taken into account. If the Federal Reserve begins to adopt a more hawkish tone, further appreciation could seem almost inevitable.

GBP/USD

Fresh optimism over Brexit and better-than-expected employment data saw the Pound add over a cent against the US Dollar during Tuesday’s trade. Such exaggerated levels of volatility are set to remain part of the landscape for Sterling at least until there’s some real clarity over Brexit.

EUR/USD

The Euro is struggling to find any meaningful direction against the US Dollar right now following the run lower which has been seen over the last two weeks. Eurozone consumer confidence data later in the day could provide some fresh indications as to the European Central Bank’s (ECB) rate outlook.

GBP/EUR

The Pound gained against the common currency during yesterday’s session, returning to the highs seen last week. As noted, these gains could prove difficult to sustain if political risk builds.