Brexit progress proves punishing for the Pound

​​​​​​Today's news headlines:

  • 'Parliamentary backing sets May on Brexit collision course with EU’. Last night’s amendments to the Brexit bill enabled the government to gain majority support for a revised divorce deal, but with the European Union already pushing back against the idea, uncertain times lie ahead for the Pound. (Financial Times)
  • 'Trump faces pressure to make deal as China trade talks resume’. Today sees high-level diplomatic talks resume between the US and China, but with Donald Trump’s key supporters suffering off the back of the retaliatory tariffs, demand for a quick resolution is building. (MarketWatch)
  • 'U.S. Consumer Confidence falls for third straight month’. The economic uncertainty caused by volatile stock markets and the extended government shutdown is rattling consumer sentiment, and yesterday’s reported fall was significantly greater than had been forecast. (Wall Street Journal)

Last night’s vote in parliament may have seen MPs show determination to avoid a no-deal Brexit, but progress now demands further concessions from the European Union. Brussels was quick to reply last night, saying it won’t reopen negotiations, which left the Pound bruised. Cross-party support was necessary to deliver last night’s results, and there’s a reasonable chance that what will be seen over the next two weeks will be little more than brinksmanship. Both sides will need to hold fast until much later in the game before a compromise can be reached. Although, with the Eurozone economies tumbling towards recession at a faster rate than that of the UK, the pressure will be mounting in Brussels not to risk making matters worse merely on a point of principle. There has been a very modest reversion for Sterling off the back of last night’s sharp sell-off, but as this saga continues to unfold, further volatility seems inevitable. The domestic political risk should not be ignored, either.

The DXY Dollar index remains relatively subdued with support for the Buck lacking. Yesterday’s shortfall in US Consumer Confidence data did little to help improve perceptions, with tangible evidence of how damaging the partial shutdown of the US Federal Government has been. With the threat looming that funding could run out once again by mid-February, added importance will be put on seeing a more conciliatory tone emerging in Washington. The potential for a more holistic outlook to be taken will be on the table again today as trade talks with China are set to resume. The retaliatory tariffs imposed by Trump are looking increasing farcical. They’re unpopular with many of his core supporters, have proved significantly damaging to the fortunes of some huge US companies such as Apple, and are being seen as playing a pivotal role in stifling world trade as a whole. The current administration has the potential today to take a longer-term view over what’s best, not only for the US economy but also on a global basis. Making the right decision here has the potential to stimulate domestic growth and slow the rapid expansion of the budget deficit. 

GBP/USD

Last night’s Brexit vote saw the Pound lose over a cent against the US Dollar, before initiating something of a rebound overnight. While the current deal needs to be ratified by Brussels again, the mood in Westminster is now one which appears committed to stopping a no-deal Brexit at any price, and that should be positive for the Pound.

EUR/USD

The commitment to avoid a no-deal Brexit has played out as positive for the Euro, with the common currency forging some modest gains over the Dollar as a result. A broadly conciliatory tone from Brussels has the potential to see the upside here extended as a result.

GBP/EUR

After some pronounced selling last night in the wake of the parliamentary vote, the Pound has made some gains over the Euro, but the upside here is limited. Evidently, the commitment to avoiding a no-deal Brexit is Euro positive, too.