British Pound Volatility Rises Ahead of Brexit Vote
What’s been happening?
Pound Sterling – UK Markets
The British pound fluctuated wildly on conflicting Brexit headlines on Monday and touched its highest level in two months against the dollar before erasing almost all of its daily gains while closing the day virtually unchanged vs the euro.
Citing a source familiar with talks, an ITV reporter claimed that the European Research Group (ERG) Brexiters were set to vote in favour of British Prime Minister Theresa May’s Brexit deal on Tuesday to revive hopes of May’s deal passing through the Parliament. Although the initial market reaction helped the pound sterling gather strength against its rivals, the currency quickly erased its gains after Steve Baker, a member of the ERG, denied the report in a Twitter message that read: “We plan to vote no to everything: all amendments and the main motion, whether or not amended. Conceivably the government will too…”
Earlier in the day, PM May announced that the government was able to secure valuable assurances from the EU on the Brexit deal and added that she would present the details to the PMs later in the day. Commenting on the EU’s reassurances, Northern Irish Democratic Union Party (DUP) member Nigel Dodds said that they did not go far enough and argued that the EU was not prepared to do what is needed for PM May’s Brexit deal to pass the Parliament. Meanwhile, touching on the possibility of Brexit being delayed, British Trade Secretary Liam Fox said the default policy for the UK would be to leave the EU with no-deal on March 29.
US Dollar – US Markets
The US Dollar Index stayed relatively calm on Monday amid a lack of macroeconomic data releases and fresh developments surrounding the government shutdown in the U.S. In its monthly Survey of Consumer Expectations, the Federal Reserve Bank of New York said the median inflation expectations at the one-year horizon remained unchanged at 3.0% in December. “Mean unemployment expectations—or the mean probability that the U.S. unemployment rate will be higher one year from now—increased for the third consecutive month from 35.8% in November to 38.8% in December, reaching the series’ high since October 2016,” the Bank further added in its publication.
In the meantime, in an interview with Fox Business Federal Reserve's Vice Chairman Richard Clarida argued that the Fed’s monetary policy was not a headwind for the U.S. economy and said that the economy had good momentum going into 2019. “The slowdown in global outlook is not yet severe, but would tend to impact U.S. exports,” Clarida stated.
Euro – European Markets
The shared currency struggled to find demand on Monday following another macroeconomic data release that reaffirmed the economic weakening in the area toward the end of the year. The Eurostat on Monday reported that industrial production in the euro area contracted by 1.7% in November following October’s 0.1% growth and the dragged the annual rate down to -3.3% compared to analysts’ expectation of -2.3%.
Meanwhile, Bank of Italy Senior Deputy Governor Salvatore Rossi told reporters that he saw a slowdown in the world economic growth alongside with “acute” slowdown in Italy. “If economic climate takes a turn for the worse and spread remains high, there is clear pressure on banks, insurers and their clients,” Rossi added.
What’s coming up?
UK: The Parliament will be voting on PM May’s Brexit deal on Tuesday.
US: NY Fed’s Empire State Manufacturing Index and Producer Price Index (PPI) data will be featured in the U.S. economic docket.
EU: The Eurostat will publish the trade balance data. Later in the day, European Central Bank President Draghi is scheduled to deliver a speech.