Fears of a ‘no deal’ Brexit weigh on the Pound

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23 August 2018

thomasdodds

Sterling edged modestly lower against its major peers on Thursday morning after reports that the UK government was stepping up plans for a ‘no deal’ Brexit.

T
he UK currency was under heavy pressure in the past few weeks, with slow progress on Brexit negotiations and resignations within Theresa May’s cabinet amplifying concerns that Britain may fail to strike a deal with the EU before the end of October deadline. Later this afternoon, the government is expected to publish 25 technical papers that provide advice to people and business on how to deal with disruptions caused by a ‘no deal’ Brexit. While we think there is undoubtedly a non-zero chance of no deal being struck, we expect a deal to be ironed out in time for either the October EU summit or the following scheduled summit in mid-December. There is even talk of an emergency summit being held in November.

With no economic news in the UK today, we expect Brexit to continue to be the main driving force behind the Pound on Thursday.

Fed highlights downside risks, still on for September hike

Last night’s FOMC meeting minutes caused little impact on the US Dollar in the end, despite them striking a slightly less hawkish tone than that of the actual statement released earlier this month. The minutes warned of downside risks from trade, housing and emerging markets, albeit they continued to point to another interest rate hike at the bank’s next meeting in September. Beyond that, we await the FOMC’s updated dot plot next month to confirm our suspicions that another hike in December is on the cards.

Next up for the US Dollar in terms of economic data will be this afternoon’s business activity PMIs for August and July’s new home sales. Of more significance will be the appearance of Fed Chair Powell at the Jackson Hole Symposium.

Eurozone PMIs slow, drag common currency with them

The Euro extended its run as this week’s best performing major currency on Wednesday, although we did see a modest correction this morning following the release of the latest business activity PMIs. The services index came in bang in line with expectations at 54.4 in August, although there was a surprise decline in the manufacturing index to 54.6 from 55.1. This drop was largely fuelled by a sharp slowdown in the German index, which continues to raise concerns that the Eurozone economy got off to a rocky start in the second half of the year.

This afternoon will see the release of the European Central Bank’s meeting accounts, although we don’t expect too many headlines and nothing that could materially shift the common currency.