Sterling Plummets On PM Brexit Stance

GBP

Sterling plunged to a 27-month low against the dollar on Tuesday and hit new six-month lows versus the euro, extending losses as the two candidates to be Britain’s next Prime Minister vied to outgun each other on taking a harder Brexit stance. Both candidate’s positions appear to be leading markets to price a sharply higher risk of Britain leaving the European Union on October 31 without any transition trading agreements in place. That would potentially force the Bank of England to cut interest rates to stave off economic catastrophe.

Sterling which already fell half a percent on Monday was headed for its biggest one-day fall since March, after Boris Johnson and his rival to be Conservative Party leader, Jeremy Hunt, said late on Monday they would not accept the so-called Northern Irish backstop element of Theresa May’s Brexit deal.

The backstop, one of Brussels’ principal demands in Brexit negotiations, is designed to prevent the return of a hard border between EU-member Ireland and British province Northern Ireland. If implemented, the U.K. would follow many EU rules until arrangements are made to avert a hard border.

The weakness extended even after employment data showed average weekly earnings unexpectedly rose 3.4% year-on-year in the three-months to May. However, the labour market strength is widely attributed to employers hiring workers who they can later lay off if needed as the claimant count change figure was printed worse than forecast at 38k against previous of 18.9k.

EUR

The euro fell on Tuesday after signs of deteriorating sentiment among German investors, although the prospect of more Central Bank easing - starting with the Federal Reserve later this month - meant another day of small, contained currency moves.

The ZEW economic sentiment survey in Germany deteriorated more sharply than expected in July, with the ZEW institute pointing to the unresolved trade dispute between China and the United States as well as political tensions with Iran.

Key Announcements

09.30 – GBP: Core CPI YoY; Forecast at 1.8% against previous of 1.7%
10.00 – EUR: Final CPI YoY; Forecast at 1.2% against previous of 1.4%
10.00 – EUR: Final CPI YoY; Forecast same as previous at 1.1%