Sterling at the Mercy of Brexit
November 14th: Highlights
- Government U-turn providing little support
- Today’s Commons debate to bring further pressure on May
- UK inflation data to confirm break of 3%
Pound in danger of downward spiral
Analysts have started to look at the “doomsday scenario” of talks breaking down completely following EU negotiator Michel Barnier’s comments recently that the EU is drawing up contingency plans should the talks collapse. Sterling is struggling to stay above important technical support at 1.3114. A daily close below that point could see the pound fall to it next support close to 1.2800.
Were the Brexit talks to break down irretrievably, the pound would suffer on two fronts; First, investors would start to sell assets denominated in Sterling pushing it lower and economic activity would collapse leading to a recession and the likely reversal of the recent rate hike.
As businesses start to consider their 2018 budgets, their expectations for the price of Sterling will determine their hedging strategy. Importers will be concerned about their costs rising if the pound falls close to parity versus the Euro although the common currency is set to also struggle through 2018 as monetary policy remains dovish.
Government concession may not be enough for rebels
This concession has, so far, appeared to have little effect on the mood of rebel MP’s who are determined to undermine Prime Minister Theresa May’s position further by voting in favour of many amendments to the original departure Bill that have been tabled from all sides and will be debated later today.
There seems to be little chance of a breakthrough in the talks that will allow the discussions to move on to the future relationship between the two sides. The economic fallout from the stalemate is already creating a slowdown and could extinguish growth entirely, while a falling pound would accelerate the rate of inflation which is already likely to break 3% when it is released later today.
Sterling is trading close to a few major support levels versus the dollar. The 100-day moving average is at 1.3114, a long term, support line is at 1.3065 (yesterday’s low) and there are several large commercial buyers close to 1.3000.
A break of those levels will bring long term supports at 1.2800,1.2520 and 1.2090 into trader’s thoughts.
FX Market in flux as monetary policy dominates
This week’s inflation data is more likely to provide greater confirmation of the ECB’s stance than that of the FOMC. Inflation in the Eurozone, whether considered on a case by case or collective basis, is benign. A headline of around 1.4% will confirm Mario Draghi’s view that there is no case for a hike in rates while in the U.S. there are concerns that tightening monetary policy next month will choke off inflation which is only just above 2%.
Several Central Bankers are making speeches this week and there is also a conference in Frankfurt where the “big four”; Yellen, Carney, Draghi and Kuroda will attend but the subject of monetary policy differences is unlikely to be raised.
German inflation data for October has already been released with a headline of 1.5%, unchanged from September. The fall in the Euro from its summer high has underlined the lack of price pressures across the region.
Have a great day!
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”