05/02/2019 - Mixed Reports Cause Sterling Volatility

GBP

The Pound experienced another volatile day of trading, with reports on Brexit contributing to a mixed day. Initially, we saw that UK construction growth was close to stalling as Brexit fears weighed on new building projects. The UK Construction purchasing manager’s index of business activity fell to 50.6 last month from 52.8, dangerously close to the 50 mark that separates growth from contraction. Brexit fears has fuelled a “wait-and-see” approach on spending, and this is now slowing construction growth to its weakest rate in 10 months.

However, optimism returned to the pound in the afternoon off the back of reports that in the event of a no-deal Brexit, goods shipped to Britain from the European Union could be waved through without checks. This would be a temporary period in order to avoid hold ups at ports and has gone some way to alleviate concerns about the extent of disruption to Britain’s economy in the event of the UK crashing out of the EU without a deal. The British government later supported this rumour as it said most goods arriving from Europe would be allowed in without fill customs checks for at least three months.

This volatile day points to signs that concern is mounting about the risk of a no-deal exit, and this is showing up in derivative markets which are predicting more currency volatility. The increase in purchasing of two-week options and two-month risk reversals show that there are increasing signs of caution for the pound in the run up to the March 29th exit date.

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