Sterling trades around three month low on ‘hard Brexit’ concerns

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17 January 2017

Written by
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The Pound steadied itself around its lowest level against the US Dollar since the surprise ‘flash crash’ in October on Monday, having slumped across the board during Asian trading on concerns that Theresa May would today signal a so called ‘hard Brexit’.

P
rime Minister May will be speaking just before midday on Tuesday and is widely expected to outline that Britain’s exit from the European Union is likely to entail the loss of access to the single market. News and speculation of a possible ‘hard Brexit’ have caused waves of selling in Sterling in the past few weeks, and we expect investors to hang on every word of May’s speech for clues as to the likely implication proposed Brexit plans would have on the UK economy.

One week implied volatility in the Pound has risen to its highest level since July this week, emphasising the considerable importance investors are placing on both Theresa May’s speech and the announcement of the Supreme Court ruling, expected early next week.

Meanwhile, the Euro was little moved against the Dollar with the US markets closed in mark of Martin Luther King’s birthday. The US Dollar has slipped somewhat from its 14 year highs in the past couple of weeks as investors grow uneasy about the lack of clarity on economic policies from President elect Trump. We could get a more fleshed plans from Trump following his inauguration on Friday.

Major currencies in detail

GBP

Sterling rallied 0.3% against the US Dollar yesterday, having sunk 1.5% during Monday Asian trading in anticipation of May’s speech today.

Governor of the Bank of England Mark Carney made his first official speech of 2017 at the London School of Economics in London on Monday evening. Carney reiterated that monetary policy could respond in either direction, keeping options open for another interest rate cut this year should consumer spending take a turn for the worse. He also claimed that the effect of a weaker Sterling on the UK would be “somewhat uncertain”, with his ambiguity creating no discernible reaction in the Pound yesterday evening.

Prior to Theresa May’s speech this morning, the latest inflation numbers are set for release this morning. Inflation is expected to have ticked upwards to 1.4% in December, although with all eyes on political developments, economic news continues to take a back seat.

EUR

With no major economic news out ahead of a relatively busy schedule, the Euro was range bound around the 1.06 level against the US Dollar on Monday. The single currency dipped 0.1% versus the greenback during the course of the day.

News there was yesterday was mostly second tier. The trade surplus in the Eurozone grew more than expected in November. The balance swelled to 25.9 billion as exports neared record highs having increased 6% over the year. Italian inflation also came in as expected at 0.5% year-on-year.

The Euro is likely to be largely out of the spotlight this week, despite the ECB’s meeting on Thursday which we expect to be fairly low key. This morning’s ZEW business confidence numbers are also not expected to be a big market mover.

USD

A public holiday in the US kept volatility at a minimum across the pond. The US Dollar index ended the London session 0.1% higher.

With no economic news, attention remained firmly on Donald Trump in the days before his official inauguration as President. We think that markets will hang on to every detail that the incoming US administration may choose to share regarding future economic policies, and expect that to be the main driver in the US Dollar in the coming days.

Fed speakers could also prove to be significant events this week, with William Dudley scheduled to speak at 13:45pm UK time this afternoon. We await clues as to the likelihood of multiple interest rate hikes in the US this year after the Fed tightened policy in December for the first time in a year.

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