Sterling slides below 1.27 on risk aversion, Brexit worries

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21 May 2019

thomasdodds

The Pound once again fell victim to heightened risk aversion in the financial markets on Tuesday morning.

S
ome weak economic data out of Asia has raised concerns that the recent uncertainty over the US-China trade conflict may already be having an impact on the area’s economy. Growth data out of Singapore and Thailand, two economies that are heavily dependent on export demand from China, both surprised to the downside.

Another economy heavily intertwined with China is Australia. The Aussie Dollar has subsequently been one of the worst performing currencies in the past few weeks, falling even further yesterday after RBA Governor Philip Lowe stated that the central bank would consider the case for an interest rate cut at the next policy meeting in June.

Elevated concerns over Brexit can also be tributed to much of the softness in Sterling this morning. With Theresa May set to announce her departure date come what may following the next parliament vote in June, attention has turned to who may replace her as PM. The fact that some of the candidates potentially in line to replace her may be advocating a ‘no deal’ has the market slightly concerned. Eurosceptic Boris Johnson has long been bookies favourite to be the next leader and has, in recent months, kept the option of a ‘no deal’ Brexit firmly on the table.

Powell says too soon to judge impact of trade tariffs

The EUR/USD rate edged lower this morning, with the common currency one of the more resilient currencies to the general risk off mode.

With no real major economic news to digest, attention was on last night’s speech from FOMC Chair Jerome Powell. While Powell’s comments on monetary policy were limited, he did state that it was too early to judge the impact of recent trade uncertainty and tariff impositions on monetary policy. The Federal Reserve will be releasing the minutes of its latest policy meeting tomorrow evening. This should provide critical insight on whether market expectations that the next move in rates will be down are correct. As we stated yesterday, we believe that they are not.

Investors will also have one eye on Thursday morning’s flash Eurozone PMI data. We will be looking for signs that suggest business activity is rebounding in European indicators. If so, we would not be a surprise to see the Euro break higher from its current lowly levels.