Market Info

GBP steadies after sharp Brexit-driven falls. USD extends recent gains. Attention now switches to manufacturing PMI surveys around the world.

01/03/2018 | OzForex

Thursday 01 March

Great British Pound

We warned here yesterday that “another tricky day lies ahead for the pound”. It did indeed have a very bad day on Wednesday; bottom of our one-day performance table by quite a margin, with losses ranging from -0.6% to -0.9% against the major currencies we follow closely here. GBP/USD lost one and a quarter cents to 1.3785, matching its low back on February 9th. Overnight it has moved lower still, and a move to the mid-1.37’s leaves the pound at its lowest level since January 17th.

Yesterday morning, the European Commission published a detailed draft withdrawal and transition agreement: more than 120 pages made up of 168 treaty articles and two protocols setting out the EU’s terms for Brexit to be negotiated over the next seven months. The document is politically incendiary in the UK, whose Government is a Coalition between the Conservatives and the Democratic Unionist Party in Northern Ireland. According to the draft, the territory of Northern Ireland would be considered part of the EU’s customs territory after Brexit, with checks required on goods coming in from the rest of the UK, under the text produced by the European commission. “A common regulatory area comprising the Union and the United Kingdom in respect of Northern Ireland is hereby established… The common regulatory area shall constitute an area without internal borders in which the free movement of goods is ensured and North-South cooperation protect.”

Theresa May told the House of Commons that, “No UK prime minister could ever agree to it… I will be making it crystal clear to President Juncker and others that we will never do so.” The European Union’s chief negotiator, Michel Barnier, denied that he was challenging the territorial or constitutional integrity of Britain. “This backstop will not call into question the constitutional or institutional order of the UK. We will respect that. I am not trying to provoke anyone here. I am not being arrogant in any way.” He may well be sincere in his claims, but ahead of a keynote speech from UK Prime Minister May on Friday, worries are growing that British businesses could find themselves without a transition deal to cushion their adjustment to life after Brexit. Moreover, it is by no means clear that all the PM’s own Conservative MP’s will back her vision if it comes to a vote in Westminster. No wonder the GBP is so weak.

US Dollar (USD)

GBP/USD expected range: 1.3700 – 1.3850

The USD index hit 90 for the first time in 2-weeks in New York on Tuesday evening and yesterday it extended these gains, both as a result of independent concerns about the GBP and EUR and another sharp fall in US equity markets which has tended recently to offer the USD some support. The DJIA closed down 382 points whilst the S+P500 index has just suffered its worst monthly drop since at least January 2016. Overnight in Asia, the USD index has further extended its gains to 90.25 and is back to where it was before US Treasury Secretary Mnuchin’s remarks in Davos in late January. It has now rallied more than two full points from its recent low of 87.95.

Wednesday’s US economic data generally came in shy of consensus expectations. Against a median estimate of a small drop to 64.1, Chicago PMI in February dropped from 65.7 to 61.9; lower than any of the 30 economists in a Bloomberg poll had been looking for. None of the seven sub-indices (prices paid, new orders, employment etc) rose on the month and the headline was the lowest since August 2017. Elsewhere, pending home sales fell by 4.7% m/m in January and though this might be simply weather-related, there’s some talk, too, that sharply rising mortgage rates on the back of higher US bond yields might be feeding through more quickly than usual into lower housing market activity.

Whatever the case, there’s no doubt that the US economic data have been running somewhat slower than expected over the past few weeks. Citibank produce a very well-regarded “economic surprise index” (scaled from -100 to +100) and this is down from a high over 80 in late-December to just 33.5 today. The Atlanta Fed’s GDPNow model which back in late January was suggesting 5.4% for Q1 GDP has been revised notably lower and after Tuesday’s durable goods numbers, the latest estimate is just 2.6%. This will be updated later today after the release of Personal income and expenditure, the ISM Manufacturing Index, and construction spending. The USD index opens this morning in Europe around 90.00