Risk aversion deflates Pound
Today's news headlines:
- 'May delivers Brexit deal ultimatum to Corbyn’. Prime Minister to bring Brexit withdrawal bill back to Parliament at the start of next month, including a controversial customs union. This goes against the wishes of grass roots conservatives but would likely ensure the support of the Democratic Unionist Party, mitigating some degree of political risk in the short term. (Financial Times)
- 'EU split over how to deal with deteriorating Italian finances’. Italy’s deteriorating public finances are once again a concern for the European Commission, who are due to issue a report on the subject in early June, which may pave the way for disciplinary action against Rome for breaching budget rules. (Reuters)
Despite limited progress in cross-party talks, Theresa May is set to bring her Brexit deal back to Parliament at the start of June. Ostensibly her last chance to complete a deal as Prime Minister, the deal is purported to include a customs union, a necessary ingredient for retention of DUP support and a parliamentary majority. The two problems with this approach are that many conservative MPs remain violently opposed to concessions inherent in the custom union arrangement while the Pro-EU contingent won’t receive a second referendum.
Fresh Eurozone woes
Italy finances are back in the spotlight again because EU budgetary rules are a prime constrain on growth within the periphery and therefore crucial fodder for European election campaigning. Given the amount of bombastic rhetoric on display surrounding this key fiscal issue, the European Commission may take a tougher line in its report on Italy’s public finances which is due on June 5th. Other Eurozone members will be watching closely for signs of weakening opposition among the classically conservative German contingent.
The Pound continues to sell off against the US Dollar, having declined for six of the last seven session. The Greenback’s safe haven draw has also garnered it’s additional strength over the past several days. Pressure is likely to continue as markets await the next step in the Brexit process.
Yesterday, the Euro topped out at the 100-day trade-weighted average for the fourth day in a row, while the Dollar continues to appreciate based on safe-haven demand. The Italian budget issue is resulting in less support for the common currency going into today.
The Pound notched up its seventh successive day of declines against the Euro yesterday, taking the cross down to levels not seen since late March as a result. Once again UK political risk is dominating despite the fact corners of the Eurozone economy are showing cause for concern.