Pound collapses as Brexit turmoil continues

Today’s macro highlights:

  • GBP - Consumer Price Index (June)
  • EUR - Consumer Price Index (June)
  • USD - Federal Reserve Beige Book

Pound collapses as Brexit turmoil continues

Sterling faced a bruising session yesterday with mounting concern over Theresa May’s prospects as Prime Minister weighing heavily on the currency. The government won another key vote over Brexit by a narrow majority - and only with the support of opposition MPs - leading GBP/USD to its biggest one day fall in almost three months, despite UK unemployment readings coming in as expected and a rather mixed bag of production readings being seen from the US. Without doubt, it’s the political risk - rather than any economic data - that is driving sentiment right now.

The UK inflation reading at 9.30am BST today has the ability to provide some clear direction over the Bank of England’s thinking when it comes to an interest rate hike next month, although the risk seems to be weighted very much on the downside here. The mounting threat of a leadership challenge in the Conservative party seems set to continue casting a shadow over GBP’s fortunes, so even if the prospect of higher borrowing costs does edge up, it seems unlikely that Sterling will find much support.

10am BST sees the release of the latest Eurozone inflation reading, but there’s some concern that the month-on-month figure could dip into negative territory. Anything that looks as if it might draw out the timeline for the ECB’s QE tapering will knock the common currency, especially against the US dollar. The pair fell yesterday on read across from concern over the UK’s fortunes, but further downside could still be seen.

The Federal Reserve's Beige Book is due for release at 7pm BST tonight and this can provide some important forward-looking insight into the health of the US economy. Recently we’ve seen the Fed paint an upbeat picture of the country’s economic prospects - something which was reiterated with the Fed Chief’s address to lawmakers yesterday - so there’s no real expectation that we’ll find any disappointment in this evening’s reading. However, given the disarray in the UK, and the drag this is providing for the Euro, it would likely take a significant shortfall to see the dollar come under any meaningful pressure.

The pair lost one and a quarter cents during yesterday’s session, the biggest one day decline since the start of May. We now have the meaningful prospect of a breakdown to fresh lows for the year and the idea of a leadership challenge for the UK government - something that increasingly looks like “when” not “if” has the potential to drive the Pound lower still.

The pair has reversed recent gains and downside pressures may well prevail in the short term, unless we see something spectacular in terms of the Eurozone inflation print today. There are however still plenty of hurdles to jump in terms of the ECB being in a position to tighten monetary policy, so any gains could prove short lived.

We’ve seen an incredibly quiet overnight session after the pair tested fresh four and a half month lows on Tuesday. As noted, even the prospect of a Bank of England rate hike seems insufficient to lift Sterling’s fortunes and GBP/EUR is very much establishing a bearish trend.