The pound has been the bellwether to the risks surrounding a no-deal Brexit in recent months. During August, speculative positions against the pound increased markedly as the potential for a no-deal Brexit scenario became more likely.
However, the beginning of this month has seen something of a turnaround in the pound’s fortunes, as a potential UK-EU deal could be reached within eight weeks from now. From a one-year low of 1.2662 in mid-August, the GBP has rallied almost 4%, to currently trade around 1.3100 against the USD.
This week could prove to be a critical week for Theresa May’s vision of Brexit. In a recent interview with the BBC, the prime minister states that MPs will have a choice between her deal, and a no-deal Brexit. This is an attempt by May to bring more extreme Conservative Brexiters into line, quell the members of her party with designs on her job, such as former foreign secretary Boris Johnson, as well as silence the supporters for a harder line of Brexit negotiations. The timing of May’s interview is no coincidence – she meets with EU leaders in Salzburg this week and the annual Tory party conference starts on 30th September.
At its September meeting last Thursday, which resulted in no change to quantitative easing and a 9-0 MPC vote to keep rates unchanged at 0.75%, the BoE noted the jobless rate falling to just four per cent and vacancy numbers rising, while regular pay growth increased to three per cent. Making monetary policy predictions from economic data currently takes a back seat against Brexit negotiations, however. Indeed Bank governor Carney – fresh from signing a contract extension to January 2020 – delivered a stern warning to Theresa May’s cabinet that a no-deal Brexit could lead to the type of economic chaos last seen at the height of the financial crisis with house prices falling by one third.
ECB and the EUR
Mario Draghi said last Thursday at the European Central Bank’s September meeting that the ‘uncertainty surrounding the inflation outlook is receding’ and expects underlying inflation to pick up towards the end of the year and to rise gradually in the medium term. Subsequently, Draghi also said that the ECB projects “significantly stronger core inflation.” Furthermore, Draghi sent investors good sentiment with regards to contagion from Italy to the rest of Europe stating that to date, all major Italian ministers and the prime minister have said that they will respect the EU’s budgetary requirements. Coupled with lower than expected US CPI figures, EUR shorts were squeezed and EURUSD popped through 1.1700 (at time of writing 1.1660), up from recent lows of ~1.1300 in mid-August.
At the meeting policymakers also confirmed their plans to stop the quantitative easing bond-buying programme at the end of this year. Despite the rhetoric from Draghi around inflation, the ECB left its expectations for inflation from 2018 to 2020 unchanged from June at 1.7%.
For more information, please contact Joe Bailey, Associate Director at JCRA, at firstname.lastname@example.org.