Brexit vote promised Pound volatility and didn’t fall short of expectations
Today's news headlines:
- ‘British Pound rallies back, turns positive even after lawmakers vote down May's Brexit deal’. A resounding loss for the government adds weight to the idea that a no-deal Brexit will be avoided, although there’s still a lack of clarity as to what happens next. (CNBC)
- ‘Shutdown bites economy, U.S. Coast Guard as Washington talks stall’. The initial estimate that the hiatus would cost the economy 0.1% of growth for every fortnight Federal employees went without pay has been upped to 0.13%. Delta Airlines alone stands to lose $25million in January revenues as a result of less government staff travel. (Reuters)
- ‘Germany dodges recession with slight growth in fourth quarter’. The annual Gross Domestic Product (GDP) reading fell to 1.5%, the weakest rate in five years. With the country being the world’s third-largest exporter, the news has underlined concerns of a global economic slowdown. (Bloomberg)
Last night’s crucial vote in the Houses of Parliament over Theresa May’s Brexit proposal had for some days been seen as having the potential to significantly increase volatility for the Pound, regardless of the outcome. There may have been an expectation that the Prime Minister would lose the vote, but there was no real understanding as to by what margin this would be, meaning that Sterling spent the bulk of yesterday’s session being sold off ahead of the event. Ultimately, the defeat was a resounding one which saw a vote of no-confidence in the government being triggered by the Labour Party, although the reaction for the Pound was sharply positive.
The Democratic Unionist Party (DUP) which props up the current government has said that it will continue this support, suggesting that Labour’s no-confidence vote will fail to trigger a path towards an early general election. On top of this, the scale of the defeat is seen as pushing back the idea that Brexit will happen on March 29th. Suggestions are growing that an extension will be necessary to try and find sufficient common ground amongst politicians, a second referendum could be triggered, and ultimately the UK’s divorce from the European Union may never happen. What happens next still remains complicated, so further volatility for Sterling is to be expected, but economists have repeated that the softer any Brexit is, the better the outcome is for the UK economy. Last night laid clear how politicians have little appetite to see the country crash out of Europe in a disorderly manner, hence the support for the Pound.
Fresh data emerged yesterday regarding the estimated impact of the US government shutdown on the country’s economy. With this event coming on top of quarterly earnings, corporates have the ability to make their own statements regarding the situation and yesterday’s news from Delta Airlines highlighted the trickle-down effect on the wider economy. Reduced travel by government employees is set to cost the airline $25 million in January alone, while the upward revision to the cost of the shutdown means it is squeezing over $1.5 billion from the economy every two weeks. However, the US Dollar is finding some broader support from the ongoing uncertainty over global trade, pushing investors to hunt out safe-havens such as the USD. Fresh disappointing economic news from the Eurozone is also adding to the Greenback’s allure.
The Pound fell by more than two cents against the US Dollar during yesterday’s session, before recovering the vast majority of these gains off the back of the vote in Parliament. There is, however, still uncertainty over what happens next in terms of both the vote of no-confidence in the government and for Brexit, which has served to keep GBP/USD below recent highs.
Both the Eurozone and the US have served up worrying economic data of late. Concerns that the Eurozone may be on the cusp of sliding into recession are dominating, although optimism that Brexit may now never happen was sufficient to provide a little support for the common currency last night.
The Pound sold off by more than a cent in the run-up to last night’s vote, but optimism that a damaging no deal Brexit can now be avoided is lending clear support. Further volatility lies ahead for the Pound, both given political risk and also key data releases including today’s UK inflation reading.