28/05 – Brexit risks keep sterling under pressure

GBP: Deadline for extension fewer than 5 weeks away
EUR: Could this be the one?
USD: Hong Kong pressure helps USD

Sterling

Sterling cracked lower yesterday across the board as headlines once again reminded traders that the UK economy is not out of the woods on Brexit nor Covid-19. The headlines themselves weren’t anything new – the UK once again noting that it doesn’t feel the need to ask for an extension of the current transition period after the EU reminded us all that they are happy to have one but it hjas to be agreed by July 1st.

The issue is that we are getting ever closer to that date and that politics in the UK are somewhat distracted from the threat of Brexit. The longer this drags on the more we fear for sterling through the month of June.

Once again there is no sterling data today so the pound is in the hands of other currencies and political headlines. These are not normally the most dutiful of carers.

Euro

The euro is driving ever higher this morning following a continued surge of optimism that this stimulus plan is large and popular enough to become more than an idea that is dead on arrival once it comes to voting.

The optimism stems from a number of points within the plan, mainly that over EUR500bn of the stimulus will be dolled out in the form of grants and not loans, something that poorer EU nations with large debt/GDP ratios have been asking for since the start. More fiscally conservative nations stand opposed to such a plan but may be more prepared to play the longer game; we can expect that future EU Budget rounds will be a lot more fraught if these grants are agreed.

As for the single currency, some believe this plan could be a gamechanger for its fortunes in the longer term and put it on a more even keel with the USD, leading to a new period of EUR strength. There are definitely more reasons for EUR strength if this deal goes through than there are at the moment.

US Dollar

A little bit of fear in markets and the USD comes back to the fore. Comments from US Secretary of State Mike Pompeo that the US will no longer treat Hong Kong as autonomous for trade and economic purposes is another shot fired by US authorities against China on trade. The announcement comes as China prepares to impose a new security law that would drastically limit civil liberties in Hong Kong.

Those of us who lived through or have studied the Cold War will know this feeling well; two rivals extracting tit-for-tat gains from each other. USDCNH touched its highest level since last September yesterday and we will not rule out further dollar gains in the short-term if the atmosphere continues to frost over.

Elsewhere

AUD is weakening this morning on the above China news, and we expect any further ratcheting up of trade pressures to have outsized negative effect on the Aussie dollar in the coming weeks.

Have a great day, and please take care.

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Jeremy Thomson-Cook

Jeremy Thomson-Cook

Jeremy has over 13 years experience working in the FX industry. As a specialist in political risk mitigation and currency hedging, he regularly advises clients on the day-to-day moves of the markets and the implications of fiscal and monetary policy on international businesses.

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