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Barnier – ‘UK to face consequences for no-deal Brexit’, No-Deal risk underpriced

Barnier – ‘UK to face consequences for no-deal Brexit’, No-Deal risk underpriced


UK consumer inflation (CPI) remained at 2.0% for June, in line with forecasts and core inflation (excl. Food & Energy) increased 0.1% to 1.8%, wholesale inflation (PPI) declined slightly. Brexit Secretary Stephen Barclay stated that ‘no-deal’ Brexit risk was being under-priced by the markets. Market unease surrounding political risks continue to weigh on Sterling and the options market has seen increased “protection” purchases. The concern is increasing that a hard negotiation stance under the next Prime Minister would lead to deadlock with the EU. 

Pound sentiment remained negative, but there was some respite as short-sellers bought Sterling (short covering) after the recent slump in price. The Pound rallied to 1.2450 against the Dollar after resisting a break below 1.2390 while the Euro hit resistance near 1.1060 as Parliament attempted to block Prorogation (a suspension of the House of Commons). The Pound opens near 1.2450 against the Dollar and 1.1070 on the Euro as we await UK retail sales and credit conditions data.


The Federal Reserve’s (Fed’s) Beige Book stated that activity expanded at a moderate pace with the outlook generally positive despite trade risks. The rate of inflation was stable to down slightly while some saw delays to business investment. Kansas City Fed President George stated that she is prepared to be flexible and adjust her view of monetary policy should downside risks materialise, but she was not convinced over the need to back a rate cut at this stage.

US housing starts declined to an annual rate of 1.25mn for June from 1.27mn while building permits dipped to 1.22mn from 1.30mn with both metrics weaker than consensus forecasts, although the data is often volatile on a monthly basis. 

The latest IMF survey suggested that the Dollar was overvalued in real terms by 6-12% while the effective exchange rate for Germany was undervalued by 8-18%. The IMF assessment is liable to trigger fresh accusations of currency manipulation and an attack on currency levels by President Trump. The comments on an over-valued Dollar and fears over more aggressive intervention pushed the US currency lower.


The Euro reversed an early dip on Wednesday to the 1.1200 handle against the Dollar and ended the day with modest gains, recovering somewhat of the previous session’s sharp intraday slide. The shared currency attracted some dip-buying interest following the release of Euro-zone consumer inflation figures, showing that the headline CPI rose 0.2% inter-month and 1.3% from a year earlier, ever so slightly higher than the preliminary readings. 

ECB Council member Benoit Coeure stated that underlying inflation is likely to move higher over the medium term. Supported by monetary policy measures, economic expansion and stronger wages growth. There are still strong expectations that the central bank will approve further monetary easing with markets pricing two 10-basis point rate cuts by the end of the year. 

The Eurozone data docket is extremely thin, meaning the pair will likely continue to track US yields in Europe. 

Data to watch: 

01:30 AUD Unemployment Rate s.a. (Jun)
01:30 AUD Fulltime Employment (Jun)
01:30 AUD Employment Change s.a. (Jun)
08:30 GBP Retail Sales (MoM) (Jun)
08:30 GBP Retail Sales ex-Fuel (MoM) (Jun)
08:30 GBP Retail Sales (YoY) (Jun)
08:30 GBP Retail Sales ex-Fuel (YoY) (Jun)
08:30 GBP BoE Credit Conditions Survey (Q2)
12:30 USD Continuing Jobless Claims (Jul 5)
12:30 USD Initial Jobless Claims (Jul 12)
12:30 USD Initial Jobless Claims 4-week average (Jul 12)
12:30 USD Philadelphia Fed Manufacturing Survey (Jul)
13:30 USD Fed’s Bostic speech
18:15 USD Fed’s Williams speech
23:30 JPY National CPI ex-Fresh Food (YoY) (Jun)
23:30 JPY National CPI ex Food, Energy (YoY) (Jun)
23:30 JPY National Consumer Price Index (YoY) (Jun)
23:50 JPY Foreign Investment in Japan Stocks (Jul 12)
23:50 JPY Foreign Bond Investment (Jul 12) 

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