Brexit updates were the stuff of headlines last week, pushing the pound in a generally higher direction before the huge gap down this week. What’s up with that?!
EU Economic Summit (starting Oct. 18)
As it turned out, the situation may have turned a bit ugly leading up to this big EU pow-wow later this week as EU negotiator Barnier admitted that they still haven’t seen eye-to-eye with the U.K. in terms of the Irish border backstop issue.
Most market participants are expecting to get some clarity on whether a “no deal” Brexit might happen or not, and this EU Summit should provide a good preview of how the special Brexit Summit in November might turn out.
Any indication that EU leaders would keep sticking to their demands could spell weaker odds of any kind of agreement being struck, especially since PM May also faces a lot of opposition within her party when it comes to seeking a compromise. On the flip side, signs that the EU or the U.K. might be willing to let a few things slide in order to get a deal through might give pound bulls hope.
U.K. employment data (Oct. 16, 8:30 am GMT)
But before all that Brexit drama hogs the spotlight, the U.K. actually has a couple of top-tier reports to print. First up is the jobs data, which would include the unemployment rate, claimant count change, and the average earnings index.
Analysts expect to see a 4.5K increase in jobless claimants for September, lower compared to the 8.7K increase in unemployment in August. The jobless rate could hold steady at 4.0% while wage growth could keep cruising at 2.6% for the three-month period ending in August.
A higher than expected pickup in wages could spur stronger inflationary pressures down the line and also support consumer spending, which would be positive for growth and BOE tightening expectations.
U.K. inflation reports (Oct. 17, 8:30 am GMT)
On the subject of inflation, pound traders could get a better idea of how price pressures are faring when the U.K. prints its headline CPI, core CPI, PPI, HPI, RPI, and HPI on Wednesday’s London session.
But before I lose y’all to these fancy acronyms, lemme tell you that these just gauge price changes across a various range of products and sectors. Among these, the headline CPI is most comprehensive and could see a dip from 2.7% to 2.6% on a year-over-year basis.
The core CPI, which strips out the most volatile components from the calculation, could also dip from 2.1% to 2.0% for the month. On the flip side, PPI could reflect a pickup in producer prices from 0.5% to 0.9% to signal stronger pressures down the line while the HPI could also accelerate from 3.1% to 3.5%.
U.K. retail sales (Oct. 18, 8:30 am GMT)
The U.K. will also report on Brits’ spending behavior by Thursday’s London session, but it’s likely that all eyes and ears will be on the EU Summit. Still, it’s worth taking note of how the actual reading turns out in order to weigh BOE tightening prospects later on.
Analysts expect to see a 0.3% dip in retail sales for the month of September, erasing the 0.3% uptick seen earlier on. A larger than expected decline could cast doubts on future BOE hikes, especially when seen in the backdrop of a potential “no deal” Brexit scenario.
Last Week’s Price Review
The pound is turning in a mixed performance but is currently a net winner (as of 2 pm GMT), so the pound is still on track for its third week of net wins.
And the pound’s a net winner this week, thanks to easing Brexit-related jitters, although Brexit-related concerns did flare up again come Friday and ahead of next week’s E.U. Summit.
The pound got hit by selling pressure on Monday. And as noted in Monday’s London session recap, market analysts were pointing to profit-taking since investors were supposedly reassessing the odds of a Brexit deal after last week’s rally.
The pound also encountered sellers when Theresa May’s spokesman said that (emphasis mine):
“It’s worth me pointing out that there is a difference between people talking optimistically about a deal and a deal – including both a withdrawal agreement and a future framework – actually being agreed.”
“There remain big issues to work through and, as the PM has said, this will require movement on the EU side.”
However, buyers would return during Monday’s U.S. session. There was no apparent catalyst at first, but a catalyst did eventually emerge when the Guardian released a report which claimed that the E.U. is looking at customs checks “away from the Irish border” in order to finally settle the Irish border issue.
There was some follow-through buying, but bulls eventually lost interest and the pound began trading sideways before encountering sellers again during Tuesday’s London session, with profit-taking being cited again as the reason for the pound’s slide.
However, the pound began to find buyers again when E.U. Chief Brexit Negotiator Michel Barnier tweeted the following:
Continuing discussions with Northern Irish political leaders today: @DUPleader, @DianeDoddsMEP & @RobinSwannUUP, @JNicholsonMEP. Working hard to explain and de-dramatise the backstop #Brexit pic.twitter.com/JLW2oQNYzG
— Michel Barnier (@MichelBarnier) October 9, 2018
And more bulls charged in later when a Dow Jones report claimed that the U.K. and the E.U. could supposedly have a meeting of the minds on the divorce terms by next Monday.
Irish minister Coveney also had some positive things to say, but he balanced it out by also saying that:
“What we do know is that the talks process has intensified this week on trying to find a way forward on the backstop but I suspect November will probably be needed as well as October to get agreement on that but we’ll know an awful lot more next Monday and Tuesday.”
Market players probably zeroed in on Coveney’s comment that talks will drag on until November since the pound’s rally abruptly stopped.
Buyers began nibbling on the pound again come Wednesday, though. And more buyers would come out of the woodworks when BBC Political Editor Laura Kuenssberg tweeted a bunch of somewhat positive Brexit-related stuff, particularly this one:
3. IF, it can be made to work, then likely Raab will appear alongside Barnier in Brussels on Monday, draft conclusions signed off by foreign ministers in Luxembourg on same day, key Cabinet on Tuesday, then EU leaders get their mits on it all on Weds night
— Laura Kuenssberg (@bbclaurak) October 10, 2018
And that’s not the end of it since even more buyers were enticed to jump in when Barnier remarked that a deal is 80% to 85% ready, adding that:
“Negotiations with the UK continue this week intensively, day and night, in the goal set by the leaders of the 27 that the agreement is ‘in reach’ at the time of the European Council of 17 October, next Wednesday.”
Demand for the pound only lasted for a couple more hours, though, since the pound’s price action became a mess after that before moving sideways.
The pound began moving uniformly again come Friday. Unfortunately for GBP bulls, the pound began moving lower after this tweet made the rounds:
BREAKING Guido sources say PM will be making a public statement later today that UK will not agree to be trapped permanently in a customs union in any circumstances. Kick back on @bbclaurak report was firm.
— Guido Fawkes (@GuidoFawkes) October 12, 2018
Theresa May’s office declined to verify the tweet and there was this follow-up tweet, which caused the pound’s slide to stall for a short while.
UPDATE: May is NOT making a public statement but the Government is expected to clarify its position today
— Guido Fawkes (@GuidoFawkes) October 12, 2018
However, Theresa May’s spokeswoman later delivered this message, which apparently caused Brexit-related jitters to flare up again ahead of next week’s E.U. Summit.
“The prime minister would never agree to a deal which could trap the UK in a backstop permanently.”
Friday’s slide was not enough to erase the pound’s gains on most pairs, though, so the pound is presently a net winner.