Sterling experienced a difficult day of trading on Thursday as fears grew around Parliaments inability to break the deadlock on the withdrawal agreement. The pound fell as Theresa May’s offer to resign failed to convince hardline Eurosceptic’ s in her party and the DUP to back her Brexit deal. This has taken its toll on the currency, and rumors of a general election and a test vote on May’s vote, rather than a meaningful one, fueled the sell-off.
Several Conservative party lawmakers tore into the divorce deal, after recent optimism now seems to have diminished. Boris Johnson, a key Brexiteer figure, looked like he would back her deal in exchange for her resignation but now appears to have done a U-turn as he labelled the deal as ‘dead’. The comes a day after the DUP said it would not support her deal, and has signaled a bearish outlook in the immediate sense.
Another sign of increased nervousness within currency markets is that expectations for how much the pound will move in the coming weeks climbed faster than bets on how much the pound will move in a year. One-month implied volatility has risen by a quarter and the difference between one-month and one-year has reached its widest point since the original referendum vote in June 2016.
The dollar experienced a strong day despite having weaker than expected data. The GDP in the 4th quarter was lower than expected at 2.2%, down even further from the expected fall. More poor data was to come, as there was a decline in benchmark U.S. treasury yields which fell to 15-month lows. Despite this, there was a risk-off attitude in the currency markets and the US dollar was the biggest beneficiary.
10:30 - GBP: UK GDP QoQ (Q4) expected to be unchanged at 0.2%