Global Themes

Pound plunges on Brexit setback
- Sterling falls to near 2-year lows
- Dollar supported by safe haven demand
- German ZEW survey to cap Euro gains?


Sterling falls to near 2-year lows
UK Prime Minister Theresa May has aborted the planned vote in Parliament on her draft Brexit deal that was slated for today in the House of Commons. It was clear Ms May faced a seemingly impossible task of achieving enough support to back the deal, forcing the PM to cancel the highly anticipated vote, just 16-weeks before Britain is set to leave the European Union (EU) on March 29. The British Pound has fallen sharply as the probability of a no-deal Brexit appears to have increased. The pound is down by almost 2% across the board, which will be a substantial shock to the business community. GBP/USD plunged to a 20-month low before bouncing off the $1.25 zone and GBP/EUR managed to find support at the €1.10 level.

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An expected barrage of Brexit-related headlines is sure to leave Sterling at risk of falling further if uncertainty and political turmoil intensifies. Despite Ms May hoping to seek more concessions from the EU, the European Council President Donald Tusk has already stated that neither the withdrawal agreement nor the Irish backstop can be renegotiated. The elevated political risk in the UK rumbles on, and Ms May’s premiership appears unstable as various critical scenarios can still play out from here, including another referendum or a no-deal Brexit, both of which could instigate masses of volatility.

Alongside the Brexit saga, UK jobs data will be released at 9:30am today, with the unemployment rate expected to remain steady at 4.1% and wages expected unchanged at 3.0% y/y.  


Dollar supported by safe haven demand
The US Dollar has benefited from safe haven appeal as spooked investors flock towards safe haven assets following the escalating Brexit drama. The revival of trade talks between the US and China would usually have boosted market sentiment but the ongoing political crisis in both the UK and in France has dented overall market sentiment. The Euro EUR/USD has dropped back below $1.14 on renewed demand for the US Dollar. The risk outlook for the dollar remains skewed to the downside though as the probability of a US rate hike this month has depreciated from 85% last week to 70% today according to Reuters.

Conditions in the US economy appear to be tightening due to the strong dollar and flattening yield curves, which Federal Reserve (Fed) Chair Jerome Powell has previously stressed as a reason to slow the pace of interest rate hikes. However, the Fed will likely be reluctant to slow its rate hike pace as it would confirm the worries that the US economy and perhaps the global economy is at risk of economic slowdown.

No top-tier economic data is due out from the US today apart from the Producer Price Index for November at 1:30pm. Traders will likely await tomorrow’s more important Consumer Price Index data to steer dollar direction.


German ZEW survey to cap Euro gains?
The Euro continues to battle against the US Dollar, attempting to retake the $1.14 handle as investors look towards the European Central Bank’s (ECB) final monetary policy meeting of the year on Thursday. This morning, the German ZEW survey is set to be released at 10:00am. The headline economic sentiment index is expected to drop to -25 in December versus -24.1 in November. If the data comes in line or falls below forecast, this highlights the fragility of the Eurozone economy and could hinder any further substantial gains for the Euro. 

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