Political Cracks in UK Hurt British Pound
What’s been happening?
Pound Sterling – UK Markets
The UK’s Office for National Statistics (ONS) on Friday reported that the gross domestic product (GDP) was estimated to have expanded by 0.6% in the third quarter following second quarter’s 0.4% reading to come in line with analysts’ estimates. “All four sectors of output contributed positively to growth in Quarter 3 2018, with the largest contribution from the services industries at 0.3 percentage points. Household spending grew by 0.5% while business investment fell by 1.2% between Quarter 2 and Quarter 3 2018,” the ONS said. Underlying details of the publication showed the UK’s total trade deficit (goods and services) narrowed £3.2 billion to £2.9 billion in the three months to September 2018. A separate report revealed that industrial production stayed unchanged on a monthly basis in September while manufacturing production grew by 0.2% in the same period. Nevertheless, none of these figures helped the British pound find demand and the currency suffered heavy losses against both the dollar and the euro.
In an interview with the BBC Radio on Friday, the DUP's Brexit spokesman Sammy Wilson said that British Prime Minister Theresa May’s proposal was not delivering on promises Northern Ireland and added that he was disappointed at May’s approach and wouldn’t support an agreement of this nature. Later in the day, Conservative politician Jo Johnson announced his resignation over the proposed Brexit deal. “The proposed Withdrawal Agreement parks many of the biggest issues about our future relationship with Europe into a boundless transitionary period. Britain stands on the brink of the greatest crisis since the Second World War,” Johnson argued in a Medium post and stated that he would vote against the agreement to revive concerns over the possibility of lack of support from the Parliament.
US Dollar – US Markets
The data published by the U.S. Bureau of Labor Statistics showed that the Producer Price Index (PPI) rose 0.6% and 2.9% in October on a monthly and yearly basis, respectively, to beat the experts’ forecasts. The core version of the index excluding volatile food and energy prices increased by 2.6% annually. Boosted by these data and the dismal performance of European currencies, the US Dollar Index, which measures the greenback’s value against a basket of six major currencies, gained traction in the second half of the day and rose to its highest level in a week to suggest that investors have already forgotten about the midterm election results.
Additionally, the first estimate of the University of Michigan’s Consumer Sentiment Index came in at 98.3 in November to surpass the market expectation of 98. “Income expectations have improved and consumers anticipate continued robust growth in employment, but consumers also anticipate rising inflation and higher interest rates,” the UoM said.
Euro – European Markets
In the absence of significant macroeconomic data releases from the euro area on Friday, the shared currency weakened against the greenback while recovering a modest portion of its recent losses vs the pound sterling.
Speaking to reporters, Italy's Finance Minister Giovanni Tria explained that they had on intention to change the key points of the budget proposal and reiterated that many EU countries had broken the EU’s fiscal rules but were able to reach an agreement eventually. “A sharp deficit reduction at this point in the economic cycle would be suicide,” Tria added. In the meantime, the Eurogroup head Mario Centeno said that Italy was a central player in Europe and a revised budget plan would help dispel market doubts on Italy’s plan.
What’s coming up?
UK: There won’t be any macroeconomic data releases from the UK on Monday and investors will stay focused on Brexit headlines.
US: Amid an empty economic calendar, treasury bond yields and Wall Street’s performance could drive the dollar’s price action.
EU: Industrial output from Italy and the unemployment rate from France will be featured in the European economic docket on Monday.