Day of reckoning ahead for the Pound and Theresa May

Today's news headlines:

‘UK and EU hammer out draft Brexit divorce’. Crunch Cabinet meeting on Wednesday in moment of danger for Theresa May. (Financial Times)
‘Brexit hopes keep Sterling, Euro bid; Dollar bulls take a breather’. Investor confidence rose on news Britain had struck a draft divorce deal with the European Union. (CNBC)
‘Pound surges to six-month high against Euro as PM prepares to present Brexit draft to Ministers’. Theresa May will seek approval from ministers at an emergency Cabinet meeting today at 2pm. (Daily Telegraph)
‘Italy budget: Rome rejects European Commission demands’. Deputy Prime Minister Matteo Salvini said a deficit target of 2.4% and a growth forecast of 1.5% were unchanged. (BBC News)

The Pound is set to be very much in the spotlight once again today following news that London and Brussels have agreed on the text of a proposed Brexit divorce deal. There’s no shortage of concern that Theresa May has given away too many concessions in getting to this stage, and a pivotal Cabinet meeting has been scheduled for 2pm GMT today to present the paper to Ministers. This has the potential to go one of two ways; either it is broadly welcomed, and the process can move to the next stage—in which case further gains for an already bolstered Pound could be seen—or conversely, a slew of Cabinet resignations follow, leaving the Prime Minister fighting for her own survival. The path such a scenario would open in terms of leadership challenges, a no-deal Brexit, and the risk of a general election would likely do nothing to support Sterling. A big move in either direction for the Pound is entirely possible today.

Away from Brexit, a flurry of high-profile economic data will be out, which has the potential to provide some meaningful insight as to how central banks need to act into 2019. 9.30am GMT sees the release of UK inflation data, and in the wake of yesterday’s news that wages were rising at their fastest pace in almost a decade, a modest uptick is likely to be seen. This, in turn, would increase the likelihood of a Bank of England (BoE) rate hike, and therefore has the potential to be positive for the Pound.

Eurozone Gross Domestic Product (GDP) for Q3 is set to be published at 10am GMT this morning, with a figure of 1.7% expected. Anything below this level would be seen as disappointing as it would reflect a quarter-on-quarter decline and have the potential to weigh further on the Euro.

US inflation data for October is also on the table for release at 1.30pm GMT, with another upswing expected. Consumer sentiment remains upbeat despite rising prices and interest rates, so there’s arguably now a resignation that monetary policy will continue to be tightened into the new year. With this in mind, the risk seems to be that any undershoot of expectations could end up weighing on the Dollar. Although the DXY index is holding close to 18-month highs, there’s still plenty of scope for a degree of profit taking to be seen.

GBP/USD

Optimism over Brexit progress has pushed Cable back above 1.3000, at least for now. However, a combination of economic and political risks could see an already volatile pair swing wildly in the hours ahead.

EUR/USD

The Euro is once again finding support off the back of Brexit optimism, with the continuing stand-off between Brussels and Italy over the budget failing to impact the pair for now. However, the risk of escalation, a backlash in London over Brexit proposals, and the possibility that today’s GDP print comes up short, leaves the risk very much weighted on the downside.

GBP/EUR

The Pound tested seven-month highs against the Euro yesterday, although any backlash in Westminster to Brexit proposals later today will have the potential to knock Sterling hard. With a range of factors in play, the cross is likely to be in for another volatile session.