Pound falls from six month high on news of no Brexit breakthrough

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5 December 2017

thomasdodds

P
resident of the European Commission Juncker told reporters yesterday that despite significant progress being made during Theresa May’s visit to Brussels, open issues meant that it was not possible to reach an agreement. Sterling had rallied by over half a percent against the US Dollar during morning trading, although erased almost all of its gains in the afternoon on the back of the news.

The Pound was little moved following yesterday morning’s construction PMI, given the sector’s relatively small contribution to overall GDP and focus on Brexit developments. The index jumped to a better-than-expected 53.1 from 50.8, its highest level in five months. Housebuilding spurred a recovery in the industry and made up for weaknesses elsewhere. This morning’s services index should shift Sterling considering the sector accounts for over two-thirds of overall activity in the UK. Any overshooting of the 55.0 expected could spur a further rally in the currency today.

US Dollar steady as investors eye tax reform

Traders were in a cautious mood in the US on Monday as the market awaits news of sweeping tax cuts in the US that many believe could foster higher growth and lead to a faster pace of Federal Reserve interest rate hikes in 2018.

The Dollar remained well supported against most major currencies, while rallying to a three week high against the Yen after the US Senate approved the tax overhaul over the weekend. The new tax legislation itself would mark the most significant change to tax laws in the country since the 1980s and the Presidency of Ronald Reagan.

This afternoon’s non-manufacturing PMI from ISM will be the main economic data release in the US today. Consensus is for a modest decline to 59.1 from 60.1. Developments on the Republicans efforts to implement the widespread tax reforms should, however, continue to be the main driver for the US Dollar in the coming weeks.

With no significant economic or political announcements in the Eurozone yesterday, the common currency continued to trade mostly within a narrow band versus the US Dollar. We did have the latest producer price index data, which showed that producer inflation slowed somewhat to 0.4% month-on-month in October. The monthly Sentix investor confidence index also dipped to 31.1 from 34.0, although the drop was not materially large enough to shift the Euro.

The crucial composite PMI from Markit will be released in the Eurozone this morning. Traders will be expecting an unrevised reading from the preliminary estimate and so today’s retail sales for October could take on more importance.