Sharp increase in Sterling volatility as Brexit talks stumble

  • ‘Pound weakens on Brexit concerns’. Progress on securing a Brexit deal wavering as the timetable for a cabinet meeting on the issue had slipped (Financial Times)
  • ‘Italy stands by main pillars of budget as EU deadline nears’. European Commission, which has given Rome until Tuesday to present a new budget, has forecast a deficit of 2.9% (Reuters)
  • ‘Dollar nears 16-month high, sterling hit by Brexit uncertainty’. Traders expect the U.S. Federal Reserve to keep tightening monetary policy (Reuters)

The Pound has taken a heavy hit in overnight trade, off the back of news that the European Union has rejected Theresa May’s plans for avoiding a hard border between the UK and Ireland. Optimism over progress here had been cheering Sterling throughout the last week and the real concern now is that any hopes of a deal being struck in November have now been taken off the table. The Prime Minister’s office has been quick to respond by saying we are now in the final stages of negotiations and such abrasive responses should be expected at this point. However, as this week also acts as the self-imposed deadline for the UK government to kick off preparations for a no-deal Brexit, the market reaction is arguably warranted. Both the European Commission and Westminster will be in the spotlight in the coming days to see if diplomacy can prevail.

In addition to the UK’s current situation, Brussels is also dealing with the imminent escalation of the stand-off over the Italian budget. Rome has tabled proposals for spending reform that it claims will keep it in line with Eurozone limits, where the deficit cannot exceed 2.4% of GDP. However, the European Commission’s analysis of events says the plans will push the deficit significantly higher. The situation has been further exacerbated by sluggish underlying Italian growth having been reported in recent weeks. Italy needs to review its proposals and has until tomorrow to do so, although Rome says only minor tweaks will be made, leaving the two parties on something of a collision course. There’s a belief that Brussels will have to react to the situation – which could entail a fine running into billions of Euros – otherwise there will be no incentive for other states to keep within the rules. This in turn however could result in a legislative stand-off, with Italy threatening to block EU budgets and policies if provoked.

Moving away from the political influence, in terms of the typical fundamental economic releases, the day ahead is very quiet. This is however set to be short lived with the latest UK Unemployment data on the cards for tomorrow morning. Most significant here will be the Average Earnings data as any acceleration here will be seen as an inflationary threat, in turn pressuring the Bank of England to take a more hawkish line over interest rates. The Eurozone ZEW Economic Sentiment survey is also slated for Tuesday and again this is expected to disappoint, underlining the issues with the ECB’s commitment to unwinding stimulus measures and normalising monetary policy within the next 12 months.

Across the Atlantic, tomorrow’s stand out figure could well prove to be the US Monthly Budget statement where rampant spending by Donald Trump’s administration is likely to push the deficit higher here. This in turn could serve to knock the Dollar from recent highs, with the weekend’s uncertainty in Europe having propelled the DXY Dollar index to fresh highs for the year.

GBP/USD

Losses for the Pound against the US Dollar, which started around the middle of last week, have been accelerating in the wake of news that Brexit progress has stalled. With limited economic data in play today, the focus will be very much on politicians and further infighting in Westminster will likely add to downside pressures here.

EUR/USD

Similarly, the Euro has been under pressure from the Greenback in recent days, although just ahead of the European session and downside pressures have accelerated. The pair now sits at fresh lows for the year.

GBP/EUR

Although Brexit woes are hitting the Pound, that potential clash between Rome and Brussels is doing nothing to lend support to the Euro right now. Questions over the future shape of both the European Union and the common currency are surfacing – the two currencies may be in lock step for some time yet.