The Pound’s volatility response to Brexit uncertainty

Today's news headlines:

  • 'Brexit worries put freeze on UK construction in January - PMI’. The pace of British building slowed unexpectedly to a 10-month low in January, adding fresh concerns over the health of the UK economy as Brexit confusion reigns. (Reuters)
  • 'US-China tariff war will divert trade to EU, says UN’. A report has highlighted that Europe would be a big winner in terms of exports if US tariffs against China were to become permanent, with foreign currency inflows bolstering the Euro as a result. (Financial Times)
  • 'Brexit: EU sounds out MPs over Irish backstop concession’. A series of legally binding assurances may now be made to ensure the UK isn’t permanently tied into a customs union, although questions still remain as to whether Brexit can be completed next month. (The Times)

Yesterday proved to be yet another volatile day for the Pound, with currency markets reacting in an erratic fashion to two key events. A surprise deceleration in UK construction underlined the drag that is being put on the economy by Brexit uncertainty, weighing on Sterling as a result. However, separate data released overnight by accountants Deloitte showed that building in the country’s key regional cities remained upbeat. In a similar vein, media reports over plans to facilitate the free flow of trade into the country in the event of a no-deal Brexit were seen as responsible for a sharp but short-lived rally on the Pound mid-afternoon. In both instances, the moves could be seen as overblown and are testament to the skittish price action that’s being seen for Sterling right now. Until the Brexit saga is resolved, this seems unlikely to change.

It has been acknowledged that a no deal Brexit will be damaging for the Eurozone economy, which is already fighting its own battles against the emerging threat of recession. However, the ongoing trade dispute between China and the US has been heralded as having the potential to provide a welcome boost to the currency bloc. The European Central Bank is already reported to be eyeing fresh stimulus measures to try and boost the economy, but these would come at the expense of seeing the Euro depreciate. However, the potential for increased European exports to fill the gap left by China and the US not importing from one another would lead to some significant purchases of Euros being made. This, in turn, would have the potential to at least shore up the common currency. Granted, there’s still time for Washington and Beijing to find some common ground and politically, Donald Trump could do well out of resolving this spat. However, the worst-case scenario of the next round of US import tariff increases kicking in on March 1st and then becoming a permanent fixture may ultimately bode well for the Euro’s outlook.

GBP/USD

The Pound continues to slide very gradually lower against the US Dollar. Mounting UK political risk and uncertainty over what happens with Brexit will continue to keep investors guessing.

EUR/USD

Mounting concerns over the health of the Eurozone economy and a lack of risk appetite are dragging the Euro lower against the US Dollar, with the pair having almost fully reversed the gains seen off the back of last week’s dovish messages from the Federal Reserve.

GBP/EUR

The Pound made modest gains off the back of the Eurozone growth data, but further upside is being limited by the lack of clarity over whether a Brexit compromise can be reached.