Sterling volatility soars amidst mounting Brexit uncertainty

Today's news headlines:

  • ‘As Trump touts trade war truce, China holds its tongue’. Beijing has been slow to applaud US concessions; markets await Chinese commerce ministry briefing on Thursday. (Reuters)
  • ‘Sterling touches 17-month low as May suffers new Brexit setbacks’. Volatile session sees some investors discount the chance of a hard Brexit. (Reuters)
  • ‘Pound rises after legal opinion says UK can reverse Brexit’. EU guidance that Article 50 can be withdrawn gave Sterling a boost. (Financial Times)

In the last 24 hours, GBP/USD has traded in a wide two-cent range, underlining the heightened levels of volatility being seen by the Pound right now. Although Brexit is very much in play here, the Dollar is also benefitting from a reversal of the risk sentiment seen at the start of the week. Donald Trump’s purported success with China over trade talks at the G20 meeting is now being called into question, and the safe-haven pull of the Dollar is benefitting as a result.

US markets will be closed today as the country observes a national day of mourning following the death of former President Bush. Scheduled economic releases will be delayed, while a testimony by Federal Reserve Chief Jerome Powell has been cancelled. This is especially pertinent as the congressional hearing may have included insight as to how quickly the Federal Reserve plans to ease off on its policy tightening. Comments on this could have helped cool the Dollar’s latest move higher.

The UK Services Purchasing Managers’ Index (PMI) is set for release at 9.30am GMT, and although a modest improvement is expected, upside for the Pound is likely to be limited as the uncertainty over Brexit continues. Manufacturing PMI spiked higher at the start of the week, but pre-Brexit stockpiling was seen as instrumental here—something that is unlikely to translate in a meaningful way to the corresponding services figure.

10am GMT sees the publication of Eurozone Retail Sales for October. This number has the potential to justify the hawkish bias the European Central Bank (ECB) remains keen to adopt, but failure to deliver expansion has the potential to initiate a marked reversion against the Euro. However, with the annualised figure forecast to jump from 0.8% to 2.0% there’s sufficient margin for a modest shortfall to still point towards mounting inflationary pressures.

Today the UK Government is being forced to publish its full legal advice over Brexit, allowing Members of Parliament to make a more informed decision over the long-term impact of the current proposed deal. Regardless of how politicians interpret the detail, this development is seemingly once again pointing towards Theresa May’s plan being rejected by Parliament when it comes to the critical vote next Tuesday. Increased uncertainty here should again be expected to take a toll on the Pound.

GBP/USD

The Pound saw heightened levels of volatility against the US Dollar yesterday. Upside off news that the UK could abandon the Brexit process was played off against the flight for safety driving demand for the Greenback. The pair tested lows not seen for 18 months, and a downward trend remains very much in play.

EUR/USD

From session highs, the Euro lost as much as a cent against the US Dollar during Tuesday’s trade, with the safe-haven allure of USD driving the market. However, the pair has rebounded off weekly lows, and optimism over Eurozone Retail Sales may help prevent further losses.

GBP/EUR

The cheer seen yesterday morning off the back of news that the UK could return to the EU fold quickly evaporated, and although the cross failed to breach two-month lows, heightened political risk in the UK has the potential to keep the Pound under pressure for some time yet.