After rallying over 5% across the past few weeks, pound US dollar exchange rate trended lower this week. The pair opened last Sunday evening at US$1.2940, before moving steadily southwards, hitting a low of US$1.27889 on Thursday. The pound rebounded off Thursday’s low to close the week at US$1.2832. The pair has managed to hold onto the bulk of its recent gains, slipping just over 1% across the week.
Let’s take a look at the themes that moved the pound and the US dollar.
Brexit has been the exclusive driver of the pound this week. Last weekend, the UK government held a special Saturday session in Parliament, one of just a handful of such sessions since World War 2. At the sitting MP’S were due to have a meaningful vote on Boris Johnson’s new Brexit deal. However, the vote was pulled after the House of Commons voted 322 to 306 in favour of the Letwin amendment. This amendment essentially closed a loophole in the Benn Act, which prevents the UK from leaving the EU without a deal. Following the Saturday session Boris Johnson requested an extension to Brexit from the EU.
The pound dropped on the open at the start of the week following Parliament’s failure to agree to the Brexit deal. The pound declined because a Brexit deal reduces the level of uncertainty surrounding Brexit for businesses. A deal is therefore beneficial for businesses, the UK economy and the pound. Failure to put a deal in place is negative for the pound.
The pound still held onto most of its gains, just dropping 0.1% on Monday as investors found comfort in the idea that a no deal Brexit is the most unlikely option now.
Brexit vote passed — timetable rejected
Boris Johnson finally had his day on Tuesday. Whilst Parliament voted in favour of his Brexit deal, they rejected the Prime Ministers’ attempt to fast track the Brexit deal through the House of Commons and the House of Lords. This meant that a Brexit deal would not be in place by 31st October. The pound dropped lower on the prospect of more Brexit uncertainty and repeated requests by Boris Johnson for an election.
Sterling continued sliding across the week as the EU failed to agree on the length of time for a Brexit extension and as the threat of a general election increased.
Boris Johnson has tabled a motion for Monday whereby MP’s will vote for or against an election. Boris Johnson needs the support of two thirds of Parliament in order to hold an election. The prospect of further domestic political uncertainty with a general election is unnerving investors. A general election could increase the prospect of a second referendum, however the benefit of this could be wiped out by the prospect of a hard left government under Jeremy Corbyn.
Brexit extension — but for how long?
Heading into the weekend, the EU had agreed that a Brexit extension was necessary but couldn’t agree for how long. French President Emmanuel Macron wants to give the UK a short extension, around 15 days. The rest of the countries in the EU want to give three months. The EU said that they are also waiting for further clarity from Westminster over a general election in the UK.
With so many questions remaining unanswered over Brexit and the domestic political landscape, the mood for the pound has soured.
Investor’s will now look ahead to Monday to see whether Boris Johnson achieves the votes he needs to call an election. Should he win the vote, the pound could sink further amid increased political uncertainty. The length of the extension granted by the EU could also impact the pound next week. Should Boris Johnson lose the vote and the EU agree on a 3-month extension the pound could stabilise
UK economic data was in short supply last week and the economic calendar this coming week is just as sparse, leaving Brexit to hog the limelight.
It has a quiet start to the week. Trade headlines were few and far between and the US economic calendar was quiet until Thursday.
Trade war headlines were mixed and low impacting. The overall message that both sides appear keen to portray is that trade talks are progressing towards a phase 1 deal. That is the official message. However, a lack of tangible results and a few mixed messages have left investors waiting for a clearer understanding of progress between the US and China.
In the previous week had been dismal, sending the dollar lower as investors increased bets that the Federal Reserve would cut interest rates at the monetary policy meeting later this month. The prospect of lower interest rates weighed on the value of the dollar.
The dollar had a quiet start to the week this week as there were no high impacting macro-economic releases until Thursday. Thursday saw a mixed bag of data, but the dollar rose anyway. US durable goods were weaker than analysts had forecast. Investors paid more attention to US manufacturing figures.
A gauge of factory activity unexpectedly increased in October for the second straight month. The flash manufacturing pmi increased to 51.5, up from 51.1 in September. The stronger than forecast figures helped ease concerns over the health of the US manufacturing sector. The sector could be stabilising after slumping heavily over the past few months. Slowing global growth and slowing global demand amid on the ongoing US — Sino trade dispute had negatively impacted manufacturing activity.
Next Week – FOMC
The stronger than forecast data helped lift the dollar. However, gains in the greenback were capped as investors remain convinced that the Federal Reserve will cut interest rates at the FOMC meeting next week. The Fed will make its monetary policy announcement on Wednesday. Investors are pricing in a 93.5% probability of a 0.25% cut. Should the Fed hold steady and not cut rates the dollar could rally.
The Fed aside, other key data points include (in order of importance) Friday’s US jobs report, US GDP data on Wednesday and Consumer confidence on Tuesday.