Pound Slips as Uncertainties About Post-Brexit Trade Linger

U.K. pound
  • Pound Slips as Uncertainties About Post-Brexit Trade Linger

The pound declined the most in a week against the dollar amid lingering uncertainties about how long it will take for the U.K. to forge post-Brexit trade agreements with the European Union.

Sterling, which depreciated against most Group-of-10 peers, also reached a 10-month low versus the euro. Prime Minister Theresa May’s government is releasing a third paper Tuesday on how it sees its future relationship with Europe. Britain and the EU still haven’t reached an agreement on when it would be time to start discussing a trade deal.

  • The pound has been buffeted not just by political uncertainty but also by underwhelming data
    • While a report released Tuesday showed that Britain posted its first July budget surplus in 15 years last month, debt costs in the fiscal year to date rose by 23 percent, the biggest increase for the period since 2010. Recent data has showed consumers flagging and wage growth lagging inflation
    • “Better-than-expected public finance data is failing to support sterling,” said Neil Jones, the head of hedge fund sales at Mizuho Bank Ltd. “My sense is fresh news from the U.K. subprime sector may be sending off early alarm bells on consumer lending. The global subprime crises may be 10 years old but we remember it like yesterday”
  • Turmoil at Provident Financial is also weighing on pound, Jones says, with the stock slumping the most on record as Chief Executive Peter Crook stepped down and as the subprime lender forecast a full-year loss and scrapped its dividend
  • GBP/USD falls 0.4% to 1.2849, approaching 1.2832 reached on Aug. 18 which was the lowest in a month
    • Support at 1.2832, Aug. 18 low, resistance at 1.2917, Aug. 18 high
  • While the Brexit papers are a positive development, it’s failing to support the pound, likely “due to the fact that EU’s reaction so far has been muted,” analysts at Commerzbank, including Esther Reichelt, write in note
    • “That means that the next round of negotiations that start next week acquires particular significance”
    • The “Brexit risk premium therefore remains one of the major factors putting pressure on sterling,” they write
  • The latest details the U.K. government will provide focus on civil judicial cooperation ahead of a much-anticipated document Wednesday on the role of the EU Court of Justice
  • EUR/GBP little changed at 0.9163, having earlier reached 0.9173 which was the highest level since Oct. 7
    • Tops 0.9153 Fibonacci hurdle which opens up GBP ‘flash crash’ spike level at 0.9415
  • Yield on 10-year gilts rose 1bp to 1.08%

About the Author

Samed Olukoya
Samed Olukoya is the CEO/Founder of investorsking.com, a digital business media, with over 10 years' experience as a foreign exchange research analyst and trader. A graduate of University of East London, U.K. and a vivid financial markets analyst.

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