Brexit unknowns set to keep Sterling volatile

Today's news headlines:

  • 'Pound edges up after May's Brexit defeat, more volatility expected’. Expectation is now that politicians will end up voting to extend the Brexit process on Thursday, pushing the focus of attention to next week’s EU leaders’ summit. Sterling volatility is likely to persist for some time yet. (Reuters)
  • 'Lighthizer casts doubts on China trade talks as major issues go unresolved’. There's no timetable for concluding talks, but US trade negotiators hope that a deal can be reached within weeks. However, Mr Lighthizer reiterated that there would be no agreement if issues weren’t resolved in a way that benefitted the US.
  • 'Spring statement: Windfall to signal change in chancellor Philip Hammond’s fiscal rules’. The statement by the Chancellor of the Exchequer will remain overshadowed by Brexit, but could offer some optimism for Sterling so long as a no-deal departure from the EU can be avoided. (The Times)

Brexit

Once again Theresa May failed to secure the support of politicians for her Brexit deal yesterday, a move which was largely expected in the wake of guidance from the UK Attorney General, Geoffrey Cox. This means that today politicians will vote on whether to accept a no deal Brexit and, assuming this fails, tomorrow on extending the Article 50 process. Critically, the latter point requires multilateral support from the remaining EU member states, with leaders convening at the end of next week to discuss the request, should it arise. If they refuse to drag the saga out any longer, the UK could still find itself out of the EU without a deal in just over two weeks’ time. With risks like this in mind, exaggerated levels of volatility for Sterling are likely to continue for some time yet.

Spring Statement

Brexit aside, the UK Chancellor Phillip Hammond will today make his spring statement, which will reflect the current strength of UK public finances. Better than expected tax receipts have helped reduce borrowing despite declining GDP. Although a no-deal Brexit would be costly to the UK economy, suggestions of an improving fiscal backdrop today could be sufficient to lend some short-term support to Sterling.

GBP/USD

The Pound sold off heavily in the wake of the Attorney General’s comments over the revised Brexit deal, losing almost two cents against the US Dollar in a matter of minutes. Some support did however emerge off the back of last night’s parliamentary vote.  Volatility is likely to be maintained given the significant political decisions to come this week and the likelihood of thinner than usual underlying market conditions. 

EUR/USD

The Euro has now recovered almost all its losses against the US Dollar in the wake of last week’s European Central Bank announcement over monetary policy. However, No-Deal Brexit would be damaging for the Eurozone economy too so positive EUR momentum could start to stall.