Investors may have been frustrated by former Foreign Secretary Boris Johnson’s comments about the movements of the pound but the market reacted more to the continuing lack of clarity with less than 50 days to go until Brexit. The pound dropped in anticipation of any new detail coming from Theresa May’s address to parliament yesterday and fluctuated more as it became clear that there was no new detail. The PM repeatedly urged MPs to vote for a deal as the only way to avoid a no-deal scenario and there are concerns that May is running down the clock to force parliament to accept the deal.
Running out of road
There is a sense that Theresa May is still kicking the can down the road, but there is little time left. The discussion in parliament between the Prime Minister and leader of the opposition, Jeremy Corbyn showed that there is still a huge gulf between the two parties and neither looks likely to move their red lines. The pound was the biggest victim, and there was no news elsewhere to give sterling any assistance. Bank of England Governor Mark Carney reflected on the general state of world trade and there was no good news for the pound there. While he highlighted the short term risk of a no-deal scenario, he noted a general change in world trade. The BoE Governor called Brexit the first test of a new global order, but warned again that if the UK leaves without a deal, it could have disastrous consequences for the economy – and by extension, for the pound. Sterling did appear to steady later in the day, but it’s clear that while the matter of Brexit remains unresolved, the pound is vulnerable and likely to remain volatile.
Wait and see
The pound did make a brief recovery against the US dollar, but that was attributed more to weakness in the greenback. The reason given was that investors are cautiously optimistic about upcoming trade talks between the US and China which may be a way to find an end to the current impasse. The dollar fell 0.4% against the euro and 0.2% versus the British pound. The WSJ Dollar Index showed that the dollar fell 0.2% to 89.84 against a basket of 16 currencies.
Times they are a changin’
The response of the dollar shows that the market is waiting for change, and meanwhile other pressures are weighing on the dollar, including the looming possibility of another government shut-down if the president doesn’t accept the counter-offer from Congress on the contentious border wall with Mexico, which is more than $4billion lighter than Mr Trump had requested.
Euro struggles due to slowdown
Meanwhile, the euro also appeared to be somewhat beleaguered. There is no doubt that a no-deal Brexit scenario would also be damaging for the Eurozone, but the bigger issue is the general economic slowdown and the geopolitical backdrop which shows a number of challenges for the central currency.
New approach expected from ECB
There is a growing expectation is that there will be a change in policy from the European Central Bank and an adjustment to forward guidance as soon as next month. While these issues rumble on, the euro appears to have lost its status as a safe haven currency and lost out against the yen and the swiss franc.