Global Themes

GBP/EUR suffers worst day since 2016
- Pound plunges after political panic
- Euro battles to prevent another weekly decline 
- Trade wars also driving volatility


Pound plunges after political panic
The British Pound endured a tumultuous day of trading yesterday as Brexit and UK political uncertainty dominated the financial market headlines. Sterling suffered its biggest one day fall in nearly two years against both the US Dollar and the Euro – losing over 1.5% in a matter of hours. The resignation of Brexit secretary Dominic Raab initiated the Sterling sell-off early yesterday morning as GBP/USD plunged over 300-pips during the day and GBP/EUR plummeted from a high of circa €1.15 to as low as €1.1247.

Less than 24 hours after UK Prime Minister Theresa May announced the Cabinet backing of a draft Brexit deal, several more ministers handed in their resignation including Cabinet minister Esther McVey. The eruption of political disarray sent the pound tumbling. The likelihood of the divorce deal passing through parliament is decreasing and the chance of a no-confidence vote against the PM is increasing. With Ms May’s leadership called into question and the panic selling of the pound, a Reuters update confirmed that investors are betting on the pound tumbling even lower in the wake of further Brexit and political jitters.

Despite Sterling stabilising today, the extreme sensitivity of it to Brexit-related news is leaving market participants on tenterhooks. A test to of fresh year lows beyond the $1.2660 level against the dollar cannot be ruled out if more Cabinet ministers hand in their notice. Similarly, a move towards €1.11 against the Euro could soon develop. The pound thus remains vulnerable to further erratic price action.


Euro battles to prevent another weekly decline
The Eurozone October inflation report due out at 10:00am this morning should see the consumer price index unchanged at 2.2% y/y and core inflation stuck at 1.1% y/y. However, a print lower could increase the downside risk on the common currency as investors assess the increasing monetary policy divergence between the European Central Bank (ECB) and the US Federal Reserve (Fed). The escalating tensions between Brussels and Rome over Italy’s controversial budget proposal and the economic slowdown in the Eurozone could also delay the ECB’s tightening schedule. The Fed, on the other hand, is expected to raise interest rates for the fourth time this year in December and two to three more times next year.

ECB President Mario Draghi is scheduled to speak at 8:30am this morning at a European Banking Congress in Frankfurt. If the Euro fends off potential negative pressure today, and closes the week above $1.1330, EUR/USD will have avoided a fifth straight week of declines.

The Euro also suffered a turbulent day yesterday following the Brexit related turmoil. EUR/USD traded in a near 100 pip range before jumping on the back of broad-based dollar weakness and ending the trading session back above $1.13.


Trade wars also driving volatility
The ongoing US-China trade war has plagued the market for many months and the dollar has become one of the major safe haven currencies in these increasingly uncertain times. Despite the dollar depreciating this week on the news that a trade deal could soon be announced; the US Currency has outperformed its major rivals this year. GBP/USD has dropped from around the $1.44 level to as low as $1.2660 this year, although Brexit has been a key driving factor in this move lower too. Similarly, EUR/USD has dropped from the $1.24 level to the current $1.13 area.

It has now been reported that China’s written response to the US demands for trade reforms is unlikely to trigger a breakthrough when President Donald Trump and Xi Jinping meet later this month (source Reuters). Negotiations will continue between the US and China ahead of the G20 summit in two weeks.

It appears though that all attention is indeed on Brexit as Atlanta Fed President, Raphael Bostic, noted yesterday – “Brexit has the Fed’s attention and poses significant implications” (source: Reuters).

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