Sterling was back on the defensive again as European markets opened for the week on Monday.
The UK currency fell to its weakest position in three weeks as traders grew increasingly pessimistic that Theresa May will come back with any form of concessions from the European Union regarding the Northern Irish border ‘backstop’. The Prime Minister is today expected to present the progress she has made to the House of Commons and it now seems a pretty good bet that she will ask parliament for more time.
The House of Commons will then, on Thursday, be voting on whether MPs are granted greater control over the Brexit progress. If May is unable to present any significant alterations to the ‘backstop’ by then, the risk that the UK doesn’t leave the EU on 29th March rises even higher and we would expect Sterling to come under renewed downward pressure.
Yesterday’s UK economic growth figures further compounded the misery for the Pound, showing the uncertainty over Brexit was having a tangible impact on economic output. It was confirmed that the UK economy expanded by just 1.4% throughout 2018, its slowest annual pace since 2012. Growth in the final three months of the year came in at just 0.2%, the same as in the Eurozone, with the economy actually contracting month-on-month in December.
Euro slides, Dollar extends gains on heightened political risk
The Euro, meanwhile, also sold-off yesterday, having now fallen in seven of the past eight trading sessions.
There was no specific catalyst for Monday’s move, with investors instead focusing in on underlying drivers, namely the soft economic news we have seen out of the Euro-area and growing political uncertainty in the US. Trade talks between the US and China broke down over the weekend, while investors have grown concerned that another government shutdown could be imminent amid ongoing disagreements among politicians regarding the US-Mexico wall funding.
An agreement ideally needs to be reached in the next few days in order to pass the funding bill through both the House and the Senate. This uncertainty has helped lift the safe-haven US Dollar and caused investors to flee from those assets deemed riskier. That being said, both the Republicans and Democrats will be keen to avoid another shutdown and our base case scenario is for an accord to be reached, and a further shutdown prevented.
We now tentatively turn our attention to tomorrow’s US inflation and Thursday’s retail sales numbers.