Sterling tanks after Brexit minister Raab resigns from post

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15 November 2018

thomasdodds

The Pound suffered from another very volatile 24 hours of currency trading, buffeted by a raft of contrasting Brexit related headlines.

S
terling initially rallied on Wednesday on the news that Theresa May won the backing of her cabinet members in favour of the draft Brexit withdrawal agreement following a five hour long emergency meeting. Gains were tempered, however, by the ongoing backlash from Tory Brexiters, the DUP and the Labour Party that suggested the Prime Minister will have a very difficult time in ensuring that the government backs the 585 page agreement in its current form.

Headlines then took a turn for the worse this morning following the news that Dominic Raab resigned from the post of Brexit minister. Raab said in his resignation statement that the regime proposed for Northern Ireland posed a ‘very real threat to integrity of UK’. He also stated that he could not support an indefinite backstop arrangement, the aim of which was to prevent a hard border between Northern and the Republic of Ireland.

Unsurprisingly the Pound tanked by around one percent off the back of the news, in what could be the final nail in the coffin for the current draft agreement, which now looks almost certain to be shot down in the parliament vote. It had already been announced on Wednesday that an emergency EU summit will be held on 25th November, in the words of Donald Tusk, should ‘nothing extraordinary happen’.

Figure 1: GBP/USD & GBP/EUR (15/11/18)

Focus remains squarely on Brexit today and all other macroeconomic news will go entirely under the radar.

EUR/USD driven by Brexit news, US inflation falls short

Away from the UK, the EUR/USD rate was driven largely by Brexit. Wednesday’s US inflation numbers came in mostly in line with expectations. The headline number was unchanged from the preliminary estimate of 2.5% year-on-year in October, a modest increase on September’s 2.3%. There was, however, a slight decline in the core inflation print to 2.1% from 2.2%, suggesting that the Federal Reserve will remain committed to raising interest rates at no more than a gradual pace next year. Robust domestic demand and an improvement in labour market conditions are, in our view, likely to keep inflation above the Fed’s target in the coming months.

With no major pieces of economic data out of the Eurozone today, the EUR/USD rate is likely to be driven largely by Brexit news once again. Friday morning’s revised inflation figures could receive some attention this week.