Pound slides as investors fearful of ‘no deal’ Brexit

The ongoing political wrangling surrounding Brexit was back dominating financial markets in the UK again on Monday.

Sterling was the worst performing major currency yesterday, down over half a percent versus its US counterpart following some more doom and gloom headlines out of the Brexit negotiations. According to reports, Britain was preparing legislation that would undercut its withdrawal agreement with the European Union, raising the risk of the UK exiting negotiations without a full trade agreement in place. EU officials warned in no uncertain terms on Monday that any tinkering with the withdrawal agreement would scupper a potential trade deal, causing investors to fret about a possible ‘no deal’ scenario before the year is out.

The reaction in the pound to the growing possibility of a ‘no deal’ Brexit has, however, been rather less aggressive than one would have anticipated - we’ve certainly not seen any knee-jerk panic selling that has characterised much of the process thus far. It will be interesting to see how sterling reacts to official word out of the negotiations, which are set to resume later on today. Should it become increasingly clear that a ‘no deal’ is the most likely scenario before Boris Johnson’s self imposed 15th October deadline, then we think there is certainly more room for the pound to fall from current levels.

Euro rangebound ahead of Thursday’s ECB meeting

With all attention in the market on news out of the UK yesterday, there wasn’t too much in the way of volatility in the other main currency pairs. EUR/USD spent much of the day in a holding pattern, with investors reluctant to open sizable positions in either direction ahead of this Thursday’s European Central Bank meeting. News that we did have on Monday was negative for the euro, with disappointing German industrial production numbers raising fresh concerns over the economic recovery in the bloc.

Aside from Friday’s US inflation data, this week is relatively light on major macroeconomic news, so almost all attention will be on Thursday’s ECB announcement. As we mentioned in the latest episode of our FX Talk podcast, we think that last week’s weak Euro Area inflation data will cause the central bank to adopt a more dovish stance during its communications this week. We think there is also a possibility that President Lagarde attempts to talk down the value of the euro.