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UK economic headwinds keep building

Today's news headlines:

  • 'May's top lawyer struggles for Brexit deal in Brussels’. Mixed reports are circulating as to how well yesterday’s talks went in Brussels, but the narrative is to resume today. With business investment in the UK shrinking rapidly in the face of uncertainty, policymakers really need to find consensus. (Reuters)
  • 'UK services employment falls at fastest pace in 7 years’. The Services Purchasing Managers’ Index (PMI) reading may have come in better-than-expected, but staffing in the sector fell sharply with businesses not replacing departing staff. Cracks are emerging in the country’s jobs market as Brexit uncertainty builds. (Financial Times)
  • 'Dollar hits two-week high on upbeat US data, Euro slips’. Dovish expectations for Thursday’s European Central Bank (ECB) policy meeting are weighing on the common currency. Talk of rate hike timing is expected to be pushed back, while news of cheap, long-term loans may also be on the table. (Reuters)

UK macro

The Pound came under fresh selling pressure yesterday despite a better-than-expected Services PMI print for February. Two key factors were in play here, namely concerns over the state of employment in the sector with staff not being replaced, along with a lack of progress in the increasingly time-critical Brexit negotiations. A slowdown in the jobs market risks an upset of the wage growth picture, a key metric determining the monetary policy stance of the Bank of England (BoE). The confluence of slacking investment and employment might precipitate further supportive measures from the BoE and undermine the Pound. One thing is clear, in addition to the March 12th crucial Brexit vote, unemployment and wage date released on the 19th of March will be under increasing scrutiny.


Tomorrow’s European Central Bank meeting has the potential to knock the Euro markedly lower, especially against the US Dollar. The slowing Eurozone economy is pushing the ECB to react in a bid to shore up growth, although they will need to do so in a measured way. The news right now isn’t universally negative, with highlights yesterday including Greece having completed its first 10-year bond auction since the credit crisis and Italy’s service sector returning to growth. Mario Draghi’s team arguably find themselves cornered, with word of stimulus measures negative for the Euro, while failure to address the situation would be seen as storing up problems for later in the year. Both scenarios have the potential to be Euro-negative.


The run lower continues for the pair, with UK economic and political uncertainty giving little cause for cheer. Any reversal here, especially with the possibility of progress emerging over Brexit, could be sufficient to help stem the sell-off, although next week’s vote in Parliament is likely necessary before any hope of a reversal in fortunes can be seen.


Better-than-expected US economic data yesterday afternoon saw the pace of the pair’s recent sell-off accelerate. The prospect of a dovish ECB statement tomorrow is also weighing here, so further positive US readings such as the ADP Payroll print today could result in further selling.


The Pound is trading largely sideways against the Euro right now. Until there’s some fresh clarity over Brexit, which could still be almost a week away, the cross may find it difficult to make further gains.