FX Market update

The pound is still feeling the effects of all things Brexit, and the unparalleled level of uncertainty concerning both that and its impact on UK politics is keeping GBP firmly on the back foot. A big few days for PM May with the meaningful vote currently still set to go ahead on Tuesday evening, with a resounding defeat for the government forecast, though many believe this will postponed at the last hour. Others speculate that May will use a heavy defeat to try to get further concessions from the EU, a tremendously risky approach as it could signal the end of her leadership before she can even approach the other EU leaders. The European Court of Justice did rule this morning that the UK can unilaterally revoke Article 50 did result in a slight spike in the pound this morning, but as it was widely expected this rally was very short-lived.

With all things Brexit obviously the main factor in the pounds fortunes, there are still other things happening and the release of the US Employment report on Friday did take some of lustre off the dollar, as fewer jobs were created in the states in November than the markets had anticipated. This led to a slight lessening of market expectations for the US interest rate path heading into next year, although a December 0.25% rate hike is still fully priced in, but the data does reduce the chances of 4 hikes next year, with markets undecided between 3 and 4 interest rate rises in 2019.

This morning’s UK economic data, showing an expected 0.1 GDP growth in the UK through October, but a sharp decline in industrial and manufacturing output and a widening of the trade gap – despite the weaker pound – highlight the Brexit impact on UK industry. A Europe wide investor confidence indicator, compiled by Sentix and released at the same time as the UK data, showed a sharp drop in sentiment within the EU, which is probably the result of a few factors – the German economic slowdown, French civil unrest and the ongoing Italian budget situation, as well as the wider market nervousness over US/Chinese trade relations – and has led to a slight softening of the EUR at the time of writing. The pound is however still trading at low levels last seen in late September.

Aside from Brexit, there are also other important economic data releases this week, as the UK releases its own employment and earnings figures for October tomorrow, the US its inflation data for November on Wednesday, and Thursday brings the ECB interest rate decision and possible forward guidance on rate normalisation. The week is rounded off with US retail sales data, but clearly, for the pound, Brexit and any new developments concerning it are all important.

The pound, although under pressure, has so far manged to avoid any more serious sharp declines as currency traders are as in the dark as the rest of us as to how this will all ultimately play out. Virtually every possible scenario is still on the table and markets, while holding GBP short positions, are reluctant to add further to these in the current environment where any headline – or Brexit bombs as they are known by traders – can result in extreme swings in the pound. A lot of negativity is currently written into GBP levels, and even a heavy government defeat in tomorrow’s vote would probably not bring about a sharply weaker pound as it widely expected, but would be yet another blow to an already beleaguered pound and should see another step lower.