Pound braced as precarious government enters Brexit negotiations

Brexit negotiations begin today, so the pound is likely to see volatility as Theresa May’s battered government tries to set out a strong position whilst still searching for support to keep it in government.

GBP/EUR is over half a cent higher than at the beginning of last week at €1.1421. GBP/USD is half a cent higher than seven days ago at US$1.2785, but GBP/AUD is nearly a cent-and-a-half lower at AU$1.6794. After a rocky week, GBP/NZD is lower than last Monday at NZ$1.7628 and GBP/CAD is well over a cent lower at C$1.6949.

The government is in a precarious position as the vital Brexit talks begin. How will this affect the pound?

What’s been happening?

The pound ended last week on mixed form. The fact that a higher-than-expected number of Bank of England (BoE) policymakers had voted in favour of raising interest rates on Thursday was still buoying demand for Sterling. However, investors were also unsettled by the news that the UK government still hadn’t sent the EU its opening ‘positioning papers’ ahead of today’s start of Brexit talks.

GBP/EUR was sinking after it was announced that Greece had finally agreed a deal with its creditors to unlock the long-overdue next tranche of bailout funding. Greece needs the payment to help it cover maturing debt costs in July; without it the country is at risk of default. The euro therefore surged on the back of market relief that catastrophe had been avoided.

The pound was able to climb against the US dollar as markets sold USD following the Federal Reserve’s decision to raise interest rates earlier in the week. Also motivating the USD sell-off was a worse-than-expected University of Michigan consumer confidence score, which slumped from 97.1 to 94.5, instead of just slipping to 97 as forecast.

What's coming up?

Political developments are likely to drive the pound this week. The UK’s Brexit negotiations start today, and many are worried that the government is severely underprepared to begin talks. The pound could therefore see strong depreciation if it seems that the UK is in a weak position, although any suggestions that Theresa May has indeed altered her approach and intends to target a ‘Soft Brexit’ could help GBP climb sharply.

Data is in rather short supply over the coming days, although the market reaction to Wednesday’s government borrowing figures will be interesting. This is because there have been numerous suggestions since the election that the government may abandon its current austerity measures.

This means public borrowing will rise, so if GBP remains unmoved following the release of the data, this could indicate that the markets indeed believe Chancellor Philip Hammond will look to increase spending, rendering the latest borrowing data rather moot.

It’s a pretty quiet week for both Eurozone and US data, so the Pound may not have much to worry about in terms of ecostats undermining its position. Thursday’s European Central Bank (ECB) Economic Bulletin and the consumer confidence figures for June could help strengthen the common currency, while several speeches from Federal Reserve officials are the most impactful events on a quiet data calendar.

We’re here to talk currency whenever you need us, so get in touch if you want to know more about the latest news or how it could impact your currency transfers.

Phil McHugh,
Trading Floor Manager

Phil provides dealing and hedging services whilst also helping to manage Currencies Direct overall market exposure.