British Pound Softer vs. Euro, Dollar on Fresh Political Angst

A soft start to the new week for Pound Sterling as markets digest the weekend's political headlines. But is this yet another overblown reaction to an increasingly repetitive story?

GBP is on the back-foot at the start of the new week amidst nerves concerning the stability of the UK's Government: the Pound-to-Euro exchange rate trades at 1.1230 at the time of writing having closed the previous week at 1.13. The Pound-to-Dollar exchange rate is quoted at 1.3072, having closed the previous week at 1.3190.

We believe the currency’s weakness stems from two sources: 1) Reports of yet another potential challenge on Prime Minister May’s leadership by 40 of her MPs and 2) Chief EU Brexit negotiator Barnier saying the EU must be prepared for talk negotiation failures.

We suspect point one is the more applicable though as fresh challenges on May opens the door to fresh political uncertainty, and the Pound hates uncertainty.

“The British Pound fell as pressure mounts on PM May amid scant progress on the Brexit talks and a report suggesting that as much as 40 Conservative MPs have agreed to sign a letter of no confidence in May; almost enough for a real leadership challenge,” says Mattias Bruér an analyst with SEB Research & Strategy.

We do however see little game-changing information in the news - the facts for domestic UK politics remain the same: The Conservative party simply cannot risk changing leader as this automatically invites the prospect of a fresh general election.

And all polls point to them losing such a contest. Therefore rationality would suggest members of the party continue to see the sense in sticking with their current leader and avoid risking a resolutely anti-business Labour party from taking control of the country

On the topic of EU negotiations; again nothing new here.

Michel Barnier told a French newspaper that the EU would necessarily have to be prepared for a breakdown in talks, as the UK has also indicated recently - this is scenario planning and why this would be news to anyone is baffling.

"This is not something new, but it is still likely to have a headline-negative impact on the exchange rate. Evidence of this can be seen in Sterling implied volatility, which has increased these past few days across most tenors," says Chiara Silvestre, Economist at UniCredit Bank.

Implied volatility is the estimated volatility of a security's price. Implied volatility increases when the market is bearish, when investors believe that the asset's price will decline over time, and decreases when the market is bullish, when investors believe that the price will rise over time. This is due to the common belief that bearish markets are riskier than bullish markets.

Therefore on both events, while we have fresh chatter, we have nothing illuminating, therefore we would expect recent ranges to be maintained and focus to rest with the key economic data releases due this week. Please see here for further details on the data.

“GBP/USD will consolidate over the coming week. In the absence of material positive economic data, GBP will not head higher because of Brexit‑related uncertainty. The EU and UK are struggling to reach a timely compromise on the divorce bill, the status of the border between Northern Ireland and EU member Ireland and the future of EU/British citizens living abroad,” says Elias Haddad, an analyst with Commonwealth Bank of Australia.

UniCredit's Silvestre agrees:

"So far, the 1.30 area in GBP/USD has proven to be a strong support level and – in the absence of a significant deterioration on the political front – we think it will continue to hold for now. Therefore, we expect cable to trade in the 1.30-1.31 region for now, with very limited upside potential. EUR/GBP should remain supported, likely trading between 0.89 and 0.90."

EUR/GBP in the 0.89-0.90 range gives us a GBP/EUR range of 1.1236-1.11.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.