Sterling slides on Brexit pessimism, calls for May resignation

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16 May 2019


Increased pessimism surrounding the Brexit process and uncertainty over Theresa May’s position as Prime Minister weighed heavily on Sterling yesterday.

he UK currency slid by over half a percent during the London trading session on Wednesday to its weakest position since mid-February following a barrage of downbeat sentiments emanating from the House of Commons. Rebels within Theresa May’s Conservative Party stated that they would once again shoot down the Prime Minister’s withdrawal agreement when it is put to a vote next month, with many Tory members reportedly calling the deal dead.

Brexit minister Stephen Barclay added to the chorus of uncertainty, stating yesterday that there was an under appreciation that a ‘no deal’ Brexit could happen. The next vote is set to take place in the first week of June, with the market heavily expecting it to fail for a fourth time. Barclay has suggested this could be the last chance saloon for the entire Brexit process. There has also been fresh talk of a leadership challenge should the vote once again fail, with Tory Party members expected to pressure May to set a clear date for her resignation later today.

FX traders are understandably concerned and look set to continue steering clear of the Pound until we receive any concrete positive news on this front.

US retail sales fall unexpectedly in April

A disappointing set of US retail sales data sparked somewhat of a recovery in EUR/USD on Wednesday, which rose back above the 1.12 level.

The surprise decline in US retail sales in April caught the market wrong-footed. Sales declined by 0.2% last month after the market had pencilled in an increase of the same amount. With the measure coming in negative in three of the past five months, it suggests to us that the current strong US labour market is not yet translating into robust consumer activity. It also adds fuel to the conversation that the world’s largest economy could be on course to slow during the remainder of the year.

Figure 1: US Retail Sales (2012 – 2019)

Risk assets lose ground on heightened trade tensions

Elsewhere in the markets, uncertainty over US-China trade relations, some soft domestic data and heightened bets in favour of RBA interest rate cuts sent the Australian Dollar to a fresh four month low.

Trade tensions have hit a host of higher yielding currencies hard, AUD being one of the worst affected, with increased geopolitical tensions sapping risk appetite during most of the month so far. News that Chinese phone manufacturer Huawei was hit with severe sanctions by the US has far from helped matters.

While recent news has been far from encouraging, the lack of knee-jerk reactions in the currency markets suggests that investors remain hopeful that a deal could be struck, possibly at the G-20 summit in Japan next month.