Despite political headwinds, Pound still not beaten

  • ‘Skip the Battle of Brexit, try trading the Bank of England's war’. Despite sluggish growth, inflation could force the BoE’s hand. (Bloomberg)
  • ‘Dollar bulls wary after cautious Fed comments, weak homebuilder report’. Federal Reserve caution over global outlook suggests Dollar rally could be near an end. (Reuters)
  • ‘Democratic Unionists refuse to back May in finance bill vote’. Budget push back questions ongoing viability of Theresa May’s leadership. (Financial Times)

Another day has passed, and Theresa May’s tenure as leader of the Conservative Party remains intact – at least for now. A leadership challenge would heighten political risk and with it have the potential to heap fresh pressure on the Pound, although developments in Westminster last night could see the prospects pick up yet again today. Last night, the Democratic Unionist Party (DUP) who Theresa May is relying on to maintain a workable majority in parliament, refused to back Conservatives on aspects of the finance bill. This is the document that puts the budget proposals into law, so while not directly related to Brexit, it sends a clear warning shot that the DUP does not like the EU divorce proposal as it stands. If Mrs May cannot galvanise her supporters in Parliament, then this throws open the risk of a general election needing to be called. In a bid to avert that outcome, the 48-letter threshold that’s required to force a no-confidence vote in the Prime Minister could easily be triggered. Sterling could see another sharp sell-off on the back of news like this.

However, Brexit complexities have also seen a number of other European Union states looking to gain further leverage from the split ahead of this weekend’s planned emergency summit, which could hamper progress again. Simultaneously, the planned move by five pro-Brexit ministers to try and push back against Theresa May’s proposals has been put on hold as they attempt to give the Prime Minister some room for manoeuvre. While a stalemate may look inevitable, arguably it’s a case of—assuming there’s no leadership shakedown—waiting until the EU summit on Sunday to understand what happens next for Brexit, and in turn, the Pound.

Yesterday’s National Association of Home Builders (NAHB) Housing Market Index from the US came in below expectations, adding to the idea that the run of rampant US rate hikes may be coming to an end. Tighter monetary policy will be necessary to manage inflation, but the pace in the New year could well be moderated, something which underlines recent comments made by Federal Reserve members and is helping push the DXY Dollar index down towards one-month lows.

Members of the Bank of England’s (BoE) Monetary Policy Committee (MPC), including Governor Mark Carney, will be quizzed by MPs on the Treasury Select Committee from 10am GMT this morning. While Brexit uncertainty may be hampering economic growth, inflation continues to pose a threat to the economy, and as such, there’s a growing risk that the UK’s central bank will be obliged to push through a series of interest rate hikes in the New Year. Any indication of such a hawkish bias in today’s comments may well be sufficient to deliver some gains for the Pound, at least in the short-term. 

US Building Permits and Housing Starts for October are set to be published at 1.30pm GMT, and again, these will be under scrutiny in the wake of yesterday’s NAHB print. Another shortfall may be sufficient to drive the Dollar lower as US investors look to manage risk going into the slow Thanksgiving holiday weekend which will start to weigh on markets from tomorrow.

GBP/USD

The Pound has been trading in a tight range against the US Dollar overnight as markets wait for the next signal. Anything else that stresses a more dovish outlook for US interest rate policy in the New Year could readily impact the Greenback, but with the mounting political risk in Westminster, Sterling has significantly more at stake.

EUR/USD

The Euro is sitting just short of two-week highs against the US Dollar, although concerns over the Italian budget situation are evidently limiting further gains. Further Dollar weakness could be sufficient to drive the pair back to levels last seen in late October.

GBP/EUR

Markets have witnessed rangebound trading for the Pound against the Euro. The short-term risk would appear to be biased against Sterling given the potential for both Brexit divorce proceedings and the UK government to be tested in the coming days. However, the fact that the European Commission is set to launch action over Italy and its budget plans tomorrow again may be sufficient to keep losses for the Pound in check, for now.