GBP slides as Brexit Secretary undermines confidence in phase one agreement

The pound weakened yesterday as comments made by David Davis suggested the UK could seek to amend the terms of last week’s Brexit deal.

The pound remains on soft form this morning. GBP/EUR is flat at €1.1332, GBP/USD has softened to US$1.3341. GBP/AUD has fallen -0.3% to AU$1.7678, GBP/NZD has dropped to -0.6% to NZ$1.9212, and GBP/CAD has fallen -0.2% to C$1.7127.

UK inflation data is set for release this morning. Read on to see why markets could have a more muted reaction to the figures than usual…

What’s been happening?

The pound slipped against the euro and US dollar yesterday after comments made by Brexit Secretary David Davis on Sunday suggested the UK would seek to change the terms of the phase one Brexit agreement only just finalised with the EU.

Davis described the agreement, which was hastily arranged at the end of last week after disagreements over the future of the Irish border threatened to scupper talks, as a ‘statement of intent’.

When setting out the terms of the agreement in a letter to MPs at the end of last week, Theresa May concluded that ‘nothing is agreed until everything is agreed’.

Taken together, May and Davis’ comments seemed to suggest the UK was intent upon changing the terms of the phase one agreement, which saw markets selling Sterling on fears that this vacillating position could hamper attempts secure a transitional agreement.

GBP/EUR exchange rate losses were softened thanks the release of poor retail sales figures from Italy.

With no other Eurozone data released for markets to react to, a worse than expected -1% month on month decline, causing a surprise -2.1% year-on-year decline, in Italian retail sales had a greater impact on euro sentiment than it would usually.

While Friday’s stronger than expected non-farm payrolls figures continued to support the US dollar yesterday, the fact that wage growth remains sluggish limited the scope for USD appreciation.

This is because markets are worried that the more long-term outlook exhibited by the Federal Reserve during this week’s monetary policy meeting will be more downbeat than hoped.

What's coming up?

UK inflation data for November is today expected to show no change in the overall pace of price growth.

The Bank of England (BoE) only hiked interest rates on the 2nd November, so the impact of high borrowing costs will not yet have had a chance to show itself in the latest consumer price index.

Markets may therefore take today’s data with a pinch of salt.

The high-impact ZEW sentiment surveys for Germany and the Eurozone could significantly impact the euro this morning; with forecasts generally being for a decline in sentiment, it seems EUR could head lower today.

There is nothing particularly impactful on the US data calendar today; with the next Federal Reserve policy meeting announcements due out tomorrow evening the US dollar could be pinned in place as markets await the results.

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Reaz Rahman
Senior Dealer

Reaz, our Senior Currency Dealer, joined us in January 2015. Reaz draws on his detailed knowledge of the foreign exchange markets to help customers to choose the right service and time to transfer.