Sterling slumped to its lowest level since October against the US Dollar at the start of this week’s session on fears UK Prime Minister Theresa May could be aiming for a so-called ‘hard Brexit’.
The Pound rallied by around two cents during last week’s session as all three British PMI reports exceeded economists’ expectations.
Manufacturing hit a two-and-a-half-year high, construction activity outperformed forecasts and the highly influential service sector saw growth hit a 17-month high. Despite signs that the Pound’s sharp -15% depreciation in 2016 was beginning to push input and output costs higher, the robust PMI reports suggest that the British economy accelerated at a pace of 0.5% in the fourth quarter.
GBP/USD was also boosted by news of higher interest rates in Hong Kong, which drove the ‘Greenback’ lower versus the Chinese Yuan and dragged the Dollar lower across the board.
However, demand for the ‘Greenback’ picked up on Friday afternoon when the latest US non-farm payrolls report saw wage growth hit a seven-year high of 2.9%. Unemployment ticked up from 4.6% to 4.7% and payroll growth slowed from 175,000 to 156,000, but the impressive wage gains were interpreted as positive for Federal Reserve rate hike bets and this drove the US Dollar higher versus the Pound.
Sterling ran into more trouble over the weekend when UK PM Theresa May appeared to suggest that Britain was heading for a ‘hard Brexit’. May said that Brexit was ‘not about keeping bits of [EU] membership’ and remarked that the referendum gave back ‘control of our borders’. The comments seen to suggest that immigration controls would be sought at the cost of single market access and this weighed heavily on the Pound as ‘hard Brexit’ speculation proliferated.
With the Pound to US Dollar exchange rate currently trading at its weakest level since October last year there is one question on traders’ minds at the moment – hard or soft Brexit?
If investors are not suitably convinced that the government is prepared to sacrifice border controls in order to retain single market access then ‘hard Brexit’ anxieties are likely to weigh on GBP/USD.
Alternatively, Sterling could recover if we see government ministers coming out and talking up the potential of a ‘soft Brexit’ whereby Britain remains in the single market. Back in October we saw Sterling register massive losses and then recover when government sentiment appeared to sway back in favour of a ‘soft Brexit’. It is possible that we could see a repeat of this scenario, but investor sentiment right now appears to point to further depreciations for GBP/USD.
|Data Item||Market Expectation|
|11th January GBP Industrial Production (YoY) (NOV)||0.60%|
|12th January GBP Bank of England Governor Carney to testify to Lawmakers|
|13th January USD Advance Retail Sales (DEC)||0.70%|
|13th January USD U. of Michigan Confidence (JAN P)||98.5|
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