Brexit woes still dominant with Pound braced for yet more volatility

Today's news headlines:

  • ‘May vows to fight for Brexit deal’. The British Prime Minister promised to ‘see this through’ when talking about Brexit, despite her party being on the edge of civil war. (Financial Times)
  • ‘China is winning the trade war with America’. Reports suggest the White House would do better to focus on areas of legitimate grievance. (Financial Times)
  • ‘Hong Kong housing prices could fall 25 percent next year if trade war worsens’. The forecast is the latest bearish call for what is traditionally one of the world's most expensive real-estate markets. (CNBC)
  • ‘US Retail Sales rebound, but consumer spending slowing’. A sharp recovery came in October, but data for the previous two months was revised lower, and the underlying trend suggests that consumer spending is probably slowing down. (Reuters)

Theresa May survived another day as Prime Minister, but Ministerial resignations yesterday morning left the Pound rattled. With pressure building for a vote of no confidence to be tabled against the Conservative party leader, there’s every expectation that this story has some distance to run. As has been noted before, her party is only holding together a wafer-thin majority with the help of Northern Ireland’s Democratic Unionist Party (DUP), meaning a change of leader could have wide-reaching implications for UK politics. As a result, the Pound is now on the back foot over how this may play out—and it goes well beyond Brexit.

With little on the UK economic calendar as the weekend approaches, Brexit-driven political developments will have the potential to provide further direction for the Pound—and the risk is without a doubt still very much on the downside. Elsewhere, fundamental updates are relatively subdued too, although Eurozone inflation data due for release at 10am GMT could provide fresh insight over the European Central Bank’s (ECB) likely next steps concerning monetary policy. The Euro has been making some modest gains after hitting multi-month lows at the start of the week, but anything that highlights the risk of the ECB not being able to conclude the asset purchase—or bond-buying—programme next month would have the potential to knock the common currency. The Brexit focus, for now, may be very much on the UK political agenda, but the remainder of the Eurozone will also take a hit if no deal can be found.

Yesterday’s collapse of the Pound helped propel the DXY Dollar index higher once again, although upside has been capped. Without a doubt, as markets move into this field of uncertainty both in political and economic terms, the Dollar’s safe-haven status will provide a draw, but it’s worth noting that yesterday’s Retail Sales data was the latest print to show the US economy is starting to flag. The Federal Reserve’s commitment to further rate hikes has the potential to keep the Dollar propped up for now, but with these mounting headwinds, there has to be a growing risk that the hawkish bias over rates may struggle to be sustained as 2019 unfolds.

GBP/USD

Despite yesterday’s panic selling, the GBP/USD pair failed to break below the lows tested earlier in the month. A modest rebound is now being seen, but more bad news on the UK political front would open the door for a slump down to 18-month lows.

EUR/USD

The pair has been pulling back steadily from the lows tested at the start of the week, although this brushes over the fact Brexit and the Italian budget stand-off both pose risks to the health of the Eurozone economy. Excepting any shocks out of the US, there’s still scope for a reversal to be seen.

GBP/EUR

The Pound posted its most significant one-day loss against the Euro since October 2016 off the back of yesterday’s news. Despite the fact a no-deal Brexit could hit the common currency too. The big risk, for now, remains one of how the UK political landscape unfolds. Further downside remains a possibility.