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Pound wobbles on renewed Brexit fears

Today’s macro highlights:

  • GBP - BoE/TNS inflation attitudes survey
  • USD - Wholesale inventories (April)

Pound wobbles on renewed Brexit fears

We saw a key statement in the ongoing Brexit saga yesterday with Theresa May providing an end-date for the parallel customs agreement that would see the UK match EU tariffs. However, there are concerns as to how the remainder of the European Union will treat the proposals. What’s more, political uncertainty in the UK will remain elevated with news that the Prime Minister is still refusing to provide a cast iron guarantee that any arrangement will be concluded within the initially promised 21-month period. A leadership challenge remains a distinct possibility and so long as the threat of this lingers, then the uncertainty is going to be weighing on the Pound.

9.30am BST this morning sees the release of a forward-looking inflation survey from the Bank of England. This quarterly piece of analysis, conducted by TNS on behalf of The Bank, looks at inflation expectations into the future. There’s a raft of data provided here, but the number to watch is arguably where inflation is expected to be in a year’s time. The previous iteration of this survey returned a figure of 2.9% - perilously close to the upper end of The Bank’s target range. If UK economic data continues to impress and there’s a real fear of inflation accelerating, then the odds of a rate hike in August will start to increase.

It’s a relatively quiet day ahead in terms of economic data from other quarters, although US wholesale inventory data is set to be released at 3pm BST. There’s a risk this figure could dip into negative territory, showing underlying uncertainty over the outlook. One negative print in isolation would usually be unlikely to have much of an impact on the dollar, but with the greenback holding close to record highs, the market may use any weakness here as an excuse to sell dollars into the weekend break.

Next week has the potential to be incredibly volatile for currencies. On Tuesday we have the House of Commons vote on the Lords’ proposed amendments to the Brexit Bill. Anything that further calls into question the government’s stewardship of the process could prove to be negative for the Pound. Wednesday sees the next Federal Reserve statement on monetary policy and the market has priced in a quarter point rate hike here. It’s the telegraphing of how many more rate hikes we can expect to see in the remainder of 2018 that will be most closely watched. Then on Thursday, the ECB is widely expected to lay out its plans for winding down its bond buying package - a deal that has been running for almost a decade and is seen as having fundamentally changed the way the European bond market operates. Add to this the G7 summit in Canada which is likely to see hostility towards the US and its trade tariffs, plus next week’s summing between Donald Trump and North Korea and there’s no shortage of events that could provide some big currency swings - and not just in the short term.

Having touched fresh two-week highs yesterday morning, reaction to the Brexit backstop arrangements quickly saw the pair lose as much as a cent. There has been something of a rebound since and the pair still finished higher on the day and an upbeat reading in that BoE inflation survey could drive the pair back towards the 1.35 level.

The pair is currently on course to match its longest winning streak since mid-February, as markets continue to discount risk arising from political change in both Italy and Spain. The prospect of a return to tighter monetary policy is also cheering sentiment. Assuming we see no surprises here - such as a stand-off over spending plans between Rome and Brussels - then EUR/USD could well continue its grind higher with a return towards last month’s highs around 1.20.

Again, the pair’s reaction to yesterday’s proposed Brexit backstop plan left the Pound to tumble by around three quarters of a cent, although the bulk of the losses were recovered by the latter part of the session. GBP/EUR is certainly on the cusp of losing what limited upward momentum it had found since the start of the year, and with progress expected from the ECB over tighter monetary policy, Sterling could well be left on the back foot.

Did you know…
The Bank of England quarterly inflation expectations survey is done by using a third party to poll several thousand members of the UK population. The previous survey asked a total of 15 questions, ranging from how much they think prices have risen by over the last 12 months, how they expect interest rates to change in the year ahead and how satisfied or dissatisfied respondents are with the Bank of England in managing inflation.