Brexit-related updates kept the pound afloat in the previous week, and the relatively light U.K. economic calendar could keep the focus on these headlines.
Transition deal approval (January 31)
EU members are set to announce their approval for their joint negotiating stance in Britain’s post-Brexit transition period. This comes ahead of the talks in Brussels due to start in February.
What’s keeping both sides at odds is Britain’s demand to vet new EU laws over the transition period instead of automatically accepting them. Of course this kind of compliance as though it were still a member state didn’t sit too well with several British officials.
Some options laid on the table include allowing the House of Commons to screen changes to EU laws and raise objections before deciding whether or not to implement them.
Manufacturing PMI (Feb. 1, 9:30 am GMT)
Another factor that could influence pound direction, particularly for the latter part of the week, might be the PMI reports. To be specific, the manufacturing PMI due on the first of next month could spur a strong reaction.
Analysts expect a climb from 56.3 to 56.6 for January, which would reflect a faster pace of industry expansion for the month. The construction PMI is due the following day and a dip from 52.2 is eyed. However, this doesn’t normally make a huge impact on GBP direction.
Last Week’s Price Review
The pound had another good run and is the second strongest currency of the week (as of 3pm GMT).
The pound showed strength from the get-go. There weren’t any apparent catalysts on Monday but market analysts pointed to easing Brexit-related jitters, citing French President Macron’s conciliatory tone over the weekend.
The pound then steadied before finding more buyers come Wednesday. As noted in Wednesday’s London session recap, the catalyst wasn’t clear since the pound began to climb after the U.K.’s latest jobs report revealed some positive undertones with regard to wage growth.
But at the same time, Brexit Secretary David Davis was being grilled in Parliament. And Davis said that he expects to hammer out a transition deal with the E.U. “before the end of March,” which likely helped to further ease Brexit-related jitters and sent the pound higher.
Moving on, the pound continued to trend higher on most pairs before getting hammered during Thursday’s U.S. session. In fact, the pound was the most volatile and worst-performing currency of the session.
There were no apparent catalysts, though, but technicals and the resurgent Greenback were the most commonly cited reasons for the pound’s slide.
To that I would add the possibility of profit-taking by pound bulls ahead of the U.K.’s GDP report, as well as profit-taking by traders who have been riding the pound’s rise due to easing Brexit-related jitters.
After all, E.U. members will approve their negotiation stance on a transition deal on January 29 next week. Also, Brexit Secretary Davis was scheduled to discuss his plans for a transition deal on Friday
Moreover, Brexiteers were heavily criticizing Chancellor of the Exchequer Hammond at the time because Hammond said that a post-Brexit U.K. would only “very modestly” diverge from the E.U., which later forced Theresa May’s office to issue a statement that the U.K.’s post-Brexit relationship with the E.U. and the changes that the U.K. will undergo must not be characterized as “very modest.”
Speaking of the U.K.’s Q4 GDP reading, that was better-than-expected , but the pound reacted by only nudging higher on most pairs, likely because they were waiting for what Davis had to say.
And when Davis did talk, the pound was hit by another wave of sellers, likely because Davis said that “There is no difference” between him, Chancellor Hammond, and PM May because they “have a coherent and forceful view in the interests of the United Kingdom.”
Davis did try to soften his tone by saying that Brexit will be delivered “on a frictionless access to the single market and political and economic freedom … in the future.“