Pound rocked by more political resignations

  • 'Sterling weakens after UK lawmakers quit PM May's party over Brexit’. Despite optimism over fresh talks in Brussels, the resignations are seen as making it harder for Theresa May to get a deal across the line. This increases the chances of a snap election being called, which would likely be negative for the Pound. (Reuters)
  • 'Trump continues to weigh EU auto tariffs’. Speaking alongside the Austrian Chancellor, the US President is continuing to suggest that import levies could be applied to European manufactured cars in a move that could hit Eurozone economies hard. (Wall Street Journal)
  • 'Fed flags end to balance sheet runoff, patience on rates’. The Federal Reserve took a non-committal stance over interest rates for the year ahead, but speculation is mounting that the bond tapering will soon come to an end. However, the central bank stressed that adjusting the balance sheet shouldn’t be seen as a panic move. (Reuters)

UK politics

Three Conservative MPs resigned yesterday, joining the eight Labour MPs who created a new independent group earlier in the week. The Pound reacted, although only in a measured way. While this move is seen as making it harder for Theresa May to push a Brexit deal through parliament in the coming days, increasing the prospect of a snap general election, it remains something of a sideshow. The move plays into the hands of the pro-Europe lobby who stand ready to take control of the Brexit agenda in less than a week’s time. Taking a no deal Brexit off the table should lend support to the Pound.

US monetary policy

The Federal Reserve meeting minutes yesterday showed members divided over the future direction of interest rates, but perhaps more significantly, highlighted a renewed focus on the Federal Reserve’s balance sheet. The Fed bought trillions of Dollars’ worth of corporate bonds in the wake of the credit crisis a decade ago and only started reducing these liabilities in 2017. It doesn’t make sense for the Fed to be reducing its balance sheet at the same time as it reduces rates and although they were quick to point out that the market was perhaps reading too much into the news, when a definitive pause is called to the quantitative tightening (QT) process, lower US interest rates and a weaker Dollar could follow.

GBP/USD

Despite getting close to a three-week high during yesterday’s session, volatility off the back of fresh political upheaval meant the Pound broke its three-day winning streak against the US Dollar. Brexit progress and political risk will continue to dominate the Pound’s direction in the near-term.

EUR/USD

The Euro continues to trade largely sideways against the US Dollar, with yesterday’s FOMC meeting minutes serving to knock any renewed enthusiasm for the common currency.

GBP/EUR

After three days of gains, the Pound is holding steady against the Euro, with the next update on Brexit progress likely to prove significant. Although talks between May and Juncker are reported to have been constructive, there is still no breakthrough. The Pound stands to be weakened by uncertainty.