Pound Falls as May Under Brexit Pressure
Sterling had a bad day on Monday as UK political headlines indicated that Theresa May is facing a renewed crisis inside the Tory party. A media report said that forty Conservative MPs are not satisfied with the way she governs and are ready to challenge her leadership. May has also received a secret letter from Boris Johnson and Michael Gove in which they accuse the government of not taking a harder line over the Brexit negotiations. The political uncertainty in the UK triggered the sell-off of the Pound.
In Europe, Michel Barnier, the chief European Union (EU) Brexit negotiator, said that the Euro-bloc is getting ready for the possibility of Brexit negotiations collapsing. Vitor Constancio, the European Central Bank’s (ECB) vice-president, noted in a speech that monetary policy will have to remain very accommodative, since the bank isn’t yet fulfilling its mandate. However, Constancio mentioned that the Eurozone’s economic recovery is robust and resilient.
Pound Sterling – UK Markets
Today, the Pound tumbled against the US Dollar with the exchange rate set at $1.30. Sterling also dipped against the Euro with the exchange rate set at €1.12. Political uncertainty and fear that Theresa May won’t be able to control her rebellious rivals in the Tory party, who find her unsuitable to rule, drove the British currency lower.
According to a Sunday Times report, forty Conservative members of the Parliament have agreed to sign a letter of no confidence in Theresa May. The signature of eight more Tory MPs is needed in order to officially challenge May’s leadership. Another report revealed that Boris Johnson and Michael Gove sent a letter to Theresa May in which they urge her to ensure that the members of her top team clear their minds over Brexit. Analysts commented that, in the letter, the Johnson-Gove duo expressed their concern over Philip Hammond’s policies which lack sufficient energy. Political headlines and a marginal progress in the Brexit negotiations so far made traders sell off the Pound.
An IMF survey that seeks to evaluate the economic conditions and prospects in Europe said that a potential “hard Brexit” would have severe effect on both the British and the EU economies. “Under such circumstances, our concern is that economic growth will suffer, especially in the UK, but also in the euro area. We are then possibly looking at appreciably lower growth than we presently project,” noted IMF’s deputy director Joerg Decressin.
US Dollar – US Markets
The US Dollar strengthened against the Euro, with the exchange rate set just under the €0.86 mark. The US Dollar Index (DXY), which measures the value of the Dollar against six major currencies, moved higher coming in at 94.61. However, investors and traders expressed their fears about the upcoming negotiations between the Senate and the House of Representatives on the long-awaited tax reform bill.
Kevin Brady, who is the Chairman of the House Ways and Means committee, said on Fox News that the House won’t accept any bill that eliminates deductions for all state and local taxes. Brady was pressed in the previous days by Republican House members in states with high taxes, such as New York and California, to keep the property tax-reduction in the proposed bill. Brady rejected the idea that the tax reform will punish lower income citizens since, as he noted, “every income bracket sees a tax relief.”
During the weekend, the Trans-Pacific Partnership (TPP) member countries, except the US, agreed on core elements for a new framework. President Donald Trump has decided to withdraw the US from the TPP trade pact. However, market analysts noted that US agricultural, small and medium sized businesses are going to get the hardest hit from the new deal since the agreement includes lower tariffs for goods traded among TPP member countries. As a result of the US’ withdrawal from the pact, analysts commented that US businesses will be less competitive when selling their products.
Euro – European Markets
The Euro fell against the US Dollar with the exchange rate set at $1.16. Important data such as the Eurozone’s GDP and inflation figures are going to be published on Tuesday and Thursday, respectively.
Philip Lane, the Irish central bank governor and a member of the ECB’s governing council said the quantitative easing (QE) extension was a needed action. “To hit the inflation target over the medium term more is needed. The open-ended extension is saying we are not in any way declaring victory yet,” commented Lane. The Irish central bank governor stressed that a decision on interest rates will be delayed because the ECB will have to reduce its monthly bond purchases first.
A report by the IMF said that the economic recovery in Europe looks increasingly durable, strengthening and broadening. The IMF proposed to European central banks to withdraw their monetary stimulus in case they record wage growth acceleration. IMF economists support the EU’s plan to turn the European Stability Mechanism (ESM) into a European monetary Fund, but stress the need for right governance.
Other Currencies – Highlights
Sterling fell against the Australian Dollar, trading just under the 1.71 AUD mark. On Wednesday, data regarding wages during the third quarter of the year will be published. On Thursday, market experts will be waiting for October’s unemployment figures. They expect Australia’s unemployment rate to pick up by 0.1%, coming in at 5.6%.
The Pound dipped against the New Zealand Dollar, trading at 1.89 NZD. The ExportNZ DHL Export Barometer survey indicated that exporters are not afraid of the Kiwi’s high exchange rate. The results of the survey showed that they expect orders to be increased in the next twelve months. More specifically, the percentage of optimistic exporters jumped from 63% to 71%.
Sterling hit a three-week low against the Japanese Yen, trading at ¥148.89. A Reuters survey showed that Japanese firms spend their cash more on overseas acquisitions than to lift wages.