Will May be backstopped?
Sterling fell across the board as the apparent cabinet support for Theresa May’s Brexit deal dissolved into flames. From Wednesday’s highs generated by cabinet backing for the draft Brexit agreement, the day started with a string of ministerial resignations starting with Brexit Secretary Dominic Raab, then Esther McVey, followed by heated discussions in the Houe of Commons. Confidence in the Pound plummeted as the speculation of a disorderly Brexit rocketed. MP Jacob Rees-Mogg’s call for a no-confidence vote, stating he believed enough no-confidence letters had been submitted, could also spell the end of May’s role as Prime Minister. Michael Gove seems unlikely to take up the Brexit Secretary post and renegotiate the draft deal and speculation mounts that he is considering his position. Theresa May vowed to stay and seal the deal but the choice could be taken from her.
Sterling fell 2%, to 1.2767 against the Dollar with no correction of note. Against the Euro, the Pound tumbled to 1.1290. Political troubles are never good for a currency but some early forecasts say GBPUSD could drop to 1.2100 on the prospect of a no-deal Brexit, leadership challenge and slower growth.
Also, significantly weaker UK retail sales, which fell for the second month in a row by -0.5%, added to the picture. Parliamentary approval of the draft withdrawal agreement and Sterling confidence are now directly correlated and currently, it appears Sterling is destined for more losses. Losses against the Euro would be milder as the prospect of a no-deal Brexit, equity market losses and lower oil prices weakens the case for European Central Bank (ECB) policy normalization significantly.
The US Dollar was mostly a bystander amidst the Brexit chaos seen yesterday. Investors are relying on the Greenback as a safe haven. The Dollar is broadly mixed against a basket of currencies with better Core Retail Sales being brushed aside as Brexit and resignations took centre stage.
The Greenback has been suffering the probability of a US-China trade deal, which could be announced as soon as this month when President Trump and China’s Xi Jinping meet at the G20 gathering in Argentina. This could have a large effect on the Greenback.
Across the pond, Industrial Production, Capacity Utilization and a speech by Chicago Fed Evans are also expected.
Political turmoil out of the UK dominated the news yesterday, which led to a very turbulent day for the Euro. Against the Dollar, the currency ended the day above the 1.1300 mark and against the Pound it finished around the 1.1275 mark. Prime Minister May had a tough day facing the House of Commons, whilst Europe sat back and watched the Pound slide against the single currency.
Italy remained on a collision course with the European Commission over the budget deficit. Deputy PM Salvini was initially quoted that a party led by him would leave the Eurozone. This was later denied but it had already had a detrimental effect on bond yields.
President Draghi is due to deliver a speech this morning, but he is widely expected to stick to his line of not changing rates until late 2019. Today sees EU and Italian CPI figures released but realistically all eyes will still be on the fallout from yesterday’s Brexit news.
Data to Watch:
08:30 EUR ECB President Draghi’s Speech
10:00 EUR Consumer Price Index – Core (MoM) (Oct)
10:00 EUR Consumer Price Index (MoM) (Oct)
10:00 EUR Consumer Price Index – Core (YoY) (Oct)
10:00 EUR Consumer Price Index (YoY) (Oct)
13:00 EUR German Buba President Weidmann speech
14:15 USD Capacity Utilization (Oct)
14:15 USD Industrial Production (MoM) (Oct)