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Currency markets tread water as geopolitical backdrop tanks

Todays headlines:

  • 'Sterling struggles as Brexit talks go nowhere’. The Pound has fallen to its lowest levels for the month after a lack of progress in Brexit talks. The most likely successors to Theresa May appear to be leave supporters, so the risk of a no-deal Brexit is back again. (Reuters)
  • 'Dollar firm vs Yen; market shrugs off China tariff hike, awaits talk results’. Currency markets have largely ignored last night’s US tariff increases, but this is likely to increase demand for the Greenback. (Reuters)

Sterling pounded

The Pound is continuing to struggle against major currencies after the long-hoped-for Brexit progress failed to materialise. It is unclear what this means for Theresa May’s future and with her successor, likely to be from a pro-leave background, the risk of a no-deal Brexit could be seen in October when the EU’s latest extension runs out. Yesterday, Sterling fell to new lows for the month against both the Euro and US Dollar, while hitting a three-month low against the Yen. With Westminster and parliament set to break for the summer in just over ten weeks’ time, the absence of progress will have the potential to keep weighing on the Pound. 

Trump's China tariffs

As threatened, and despite ongoing talks between China and the US, fresh tariffs were applied to $200 billion worth of Chinese goods last night. Currency markets have shown little immediate reaction to the news, but expectations are that this will continue to fuel institutional demand in Asia for the US Dollar. The DXY Dollar Index has appreciated marginally overnight but assuming there’s no quick resolution to the tariff situation, and it’s not a short-term ploy, further gains for the Greenback could follow.

GBP/USD

The Pound continues to trend lower against the US Dollar, but given the current geopolitical backdrop of Brexit inertia and the safe-haven draw of the Greenback, this is hardly surprising. Political, rather than economic developments, have the potential to provide any longer-term shift in sentiment for the pair.

EUR/USD

The Euro has spent the week trading in a relatively narrow range against the US Dollar. The pair jumped higher during yesterday’s trade, but there was no apparent fundamental driver behind the move. However, rising global trade tensions will likely do little to support the Eurozone’s longer-term outlook.

GBP/EUR

Brexit inertia has left the Pound struggling against the Euro, with the cross presently on course to post its biggest weekly decline since October 2017. Some selective bargain hunting could be seen, which would have the potential to at least slow the Pound’s decline. However, unless there’s a significant shift in the political narrative, Sterling is likely to remain under pressure.