Conflicting Brexit messages knock Sterling
Today's news headlines:
- 'Sterling falls as doubts emerge over cross-party Brexit talks’. Contrary to comments from Jeremy Hunt over the weekend, opposition leader Jeremy Corbyn said there was no sign of the government shifting its red lines, while the Labour Party quickly dismissed any stalling of progress. (City A.M.)
- 'Dollar gains as report of dovish European Central Bank members dents Euro’. Some ECB policymakers feel the bank’s economic projections are too optimistic and a majority of those involved in rate setting doubt growth will recover in the second half of the year. (Reuters)
Reports emerged yesterday that Jeremy Corbyn claimed cross-party Brexit talks were already stalling, which took a toll on the Pound. This contradicts claims from both the government and his Labour Party at the weekend. Downside pressure on Sterling has been slow to relent and serves to underline the ongoing political risk with the potential to weigh on the Pound for some time yet. With volatility likely to increase as we approach the long weekend break, the Pound is set to be increasingly vulnerable to negative messages like this.
The question about the Eurozone’s ability to steer away from recession remains unanswered, and policy setting members of the ECB now seem to be doubting that a long-predicted recovery will materialise this year. There are even suggestions that the modelling methods used by the bank may need to be reviewed, given the frequency with which downward revisions are being made. The position is however very much at odds with the recent rhetoric from ECB chief Mario Draghi, suggesting the Euro could, in the coming months, make a significant move in either direction.
Yesterday, the Pound saw its biggest one day decline against the US Dollar in almost two weeks, although the pair remains stuck in a relatively narrow channel. Today’s UK inflation reading has the potential to inject some fresh direction, especially if it breaks above the Bank of England’s (BoE) 2.0% target.
The Euro lost a little ground against the US Dollar yesterday as a result of the ECB reports mentioned earlier, but the subsequent recovery has been a swift one. Upbeat Chinese Gross Domestic Product (GDP) data is fuelling risk sentiment and buoying the Euro. Today’s EU inflation data is likely to add to the debate.
Overnight, the Pound moved to nearly one-month lows against the Euro, as a result of Brexit talk concerns. Given the uncertainty over Britain’s exit, the UK’s political outlook and the Eurozone’s performance through 2019, volatility could soon accelerate once again for this cross.