Brexit set to remain front of mind for Sterling

Today's news headlines:

  • 'Nissan cancels plans to make X-Trail SUV in the UK, in a blow to Theresa May’. Despite previous commitments from the Japanese car giant to produce this line in Sunderland, a decision has been made to consolidate manufacturing of the line in Japan so the company can remain competitive. (CNBC)
  • 'French employers warn of no-deal Brexit chaos’. Business leaders across the English Channel are now publicly admitting that the impact of a no-deal Brexit will be felt on both sides of the Atlantic, even though officials are said to be looking at delaying the implementation of full border controls.’ (Financial Times)
  • 'JP Morgan says 2020 might not be year to think about recession’. The major bank has noted that the US Federal Reserve’s early decision to scale back its interest rate hike ambitions could bode well for the economy in the medium-term. (Bloomberg)

There’s less than two months to go before the UK is due to leave the European Union and with Theresa May increasingly adamant that the deadline will be met, political posturing over Brexit is set to remain very much at the forefront of minds in the days ahead. However, consensus is emerging that this won’t necessarily be universally negative for the Pound. It is still a week and a half until the next round of voting takes place in parliament and this has been accompanied by suggestions that the date, February 14th, could also see moves amongst some politicians to create a new ‘centrist’ party, presenting some meaningful political risks for the currency. The Prime Minister is due to attend further talks with European leaders in Brussels too, and although the outward message has consistently been that there will be no further revisions to the deal which is on the table now, the risk a disorderly Brexit poses to the remainder of the European Union has been laid bare. While this combination of ongoing uncertainty and resurgent domestic political risk has the potential to weigh on the Pound over the next 10 days, there’s still a reasonable chance that concessions will be forthcoming.

Meanwhile, news from Nissan has presented the realities of leaving the customs union, with the company serving up its own Brexit shock by backtracking on promises over car production. This makes it the latest name in the sector to take precautionary measures over the potential disruption that lies ahead, and removes further valuable foreign currency inflows into the United Kingdom, something which does little to favour the Pound. Yet again, it has been reiterated that the worst case no-deal scenario will be disruptive on both sides of the English Channel. Over the weekend, business lobby groups in France and Germany were reported in the Financial Times to be incredibly concerned over the damaging effects their businesses would face from trade disruption. With this in mind, there’s a real prospect for a more conciliatory tone to be seen in the next round of talks and markets appear to be trying to factor this in. The Pound fell against the Euro in early Asian trade last night, before reversing these losses, suggesting there’s still a degree of optimism that despite the clock running down, a compromise can be achieved that will leave the UK economy in reasonable shape even if the March 29th deadline is to be met.

GBP/USD

The Pound has been sliding for the last week against the US Dollar, although overall losses have been limited. UK political risk has the potential to maintain downside pressure.

EUR/USD

The Euro staged a modest rebound on Friday morning, fuelled by better-than-expected Eurozone inflation data. However, this rebound proved unsustainable with the overhang of Thursday’s Italian recession news dominating.

GBP/EUR

Weak data on Friday morning sank the Pound, although despite Brexit headwinds, these losses haven’t been sustained. With UK political risk likely to remain exaggerated for some time yet, gains could prove difficult to find.