It’s gonna be one busy week for the pound with the BOE statement coming up and a few top-tier reports on the docket. Oh, and don’t forget the entire Brexit drama, too!
PM May’s speech (Dec. 17)
Brexit episodes are off to a running start this week as No. 10 is due to give a speech urging parliament to “not break faith with the British people” by supporting the transition deal and dropping calls for a second referendum.
Recall that PM May has been busy seeking reassurances from EU leaders regarding the backstop proposal – something that has drawn a lot of opposition from hardcore Brexiteers and led her to call off the “meaningful vote” last week.
However, sources are reporting little to no evidence of actual clarifications from EU officials either, which doesn’t make May’s job any easier. Hold on to your tea, fellas!
U.K. inflation figures (Dec. 19, 9:30 am GMT)
Another batch of inflation figures are due this week and this usually provides some guidance on the BOE’s monetary policy bias. But with all eyes and ears on Brexit these days, pound traders might not bat an eyelash with the CPI results.
Headline inflation is slated to dip from 2.4% to 2.3% likely due to weaker oil prices in the previous month while the core reading could also dip from 1.9% to 1.8%.
Producer input prices could post a hefty 2.8% slide after the earlier 0.8% uptick while producer output prices might see a 0.1% drop. The house price index could also fall from 3.5% to 3.3% while the RPI could drop a notch from 3.3% to 3.2%.
U.K. retail sales (Dec. 20, 9:30 am GMT)
Next up in terms of top-tier data, we’ve got the November retail sales report which should provide an inkling of how overall growth figures might turn out. After all, consumer spending accounts for a huge chunk of GDP and also acts as a leading indicator for business production.
U.K. retail sales might post a 0.3% uptick after the earlier 0.5% decline in October, possibly on account of holiday shopping sprees. However, weaker than expected results or another decline could lead traders to pare BOE tightening hopes, especially with Brexit posing more uncertainties.
BOE decision and MPC minutes (Dec. 20, 12:00 pm GMT)
The reaction to the retail sales report might be limited since a bigger event in the form of the BOE monetary policy statement is due just hours later. No actual changes to interest rates or asset purchases are eyed, but traders are likely to pay close attention to how policymakers weigh in on Brexit developments.
Increased focus on “no deal” preparations could remind traders of how much damage this scenario could cause on the U.K. economy, especially after the BOE already released their forecasts on various potential outcomes.
Last Week’s Price Review
The pound fell behind the Kiwi and is now the worst-performing currency of the week (as of 3 pm GMT).
And if you thought that the pound’s poor performance this week was due to Brexit, then you’re right.
The pound found sellers early on, likely because of profit-taking ahead of the ECJ’s decision.
And when the ECJ finally announced its decision during Monday’s London session, the pound tried to jump higher since the ECJ’s decided that the U.K. can indeed unilaterally reverse Brexit.
— EU Court of Justice (@EUCourtPress) December 10, 2018
However, the decision was widely expected since the ECJ’s Advocate General already gave that recommendation last week, which likely prompted some GBP bulls to take some profits off the table.
Fresh sellers also very likely joined the fray, though, since the ECJ decision, coupled with last week’s legal advice on her Brexit deal, meant that odds for either a no-deal Brexit scenario or canceling Brexit altogether are both higher while odds that MPs will vote for Theresa May’s deal are much lower.
And in the face of her imminent defeat, Theresa May responded by calling for an emergency meeting, which fueled speculation that British PM Theresa May would either delay Tuesday’s “Meaningful Vote” or announce her resignation.
The PM has called together all her senior aides for a meeting on the Meaningful Vote in No10 now. A decision on whether to pull it appears imminent.
— Tom Newton Dunn (@tnewtondunn) December 10, 2018
The Cabinet conference call is being held at 11.30.
Ministers are now assuming she will delay the meaningful vote.
One minister jokingly suggested she could be about to resign.
This was, I repeat, meant as a joke although in the current climate…
— Steven Swinford (@Steven_Swinford) December 10, 2018
And, well, Theresa May announced during Monday’s U.S. session that the “Meaningful Vote” was indeed delayed, which gave a the pound a painful kick.
Follow-through selling after Theresa May’s announcement was only limited, though. The pound even began to tilt to the upside on most pairs. There were no apparent catalysts for the pound’s recovery, but as noted in Tuesday’s London session recap, market analysts were pointing to possible short-covering after the severe beat-down on Monday.
At any rate, bears would launch another attack during Tuesday’s U.S. session, thanks to rumors that a leadership challenge against Theresa May was in the works.
There were even rumors that the 48 letters needed to trigger a leadership challenge have already been met.
Confidence vote watch. I know it’s a dangerous game to play and Sir Graham is keeper of the list. But my ERG sources pretty confident now that 48 trigger been breached. Of course Sir Graham won’t announce while PM out of country – and we’ve been here before. But mood hardening
— Beth Rigby (@BethRigby) December 11, 2018
The selling pressure eventually abated and GBP pairs traded sideways for a while. Buyers would finally return after the leadership challenge against Theresa May was officially announced during Wednesday’s London session, likely because of short-covering, although fresh buyers may have also been bidding the pound higher since MPs quickly began expressing public support for Theresa May.
In fact, there were already 158 MPs who expressed support for Theresa May by the end of the session, which is the number of votes needed to keep Theresa May in power.
Our @BBCNews tally says 158 Tory MPs have now said they will be backing the PM tonight – remember it’s secret ballot but that’s enough for her to win
— Laura Kuenssberg (@bbclaurak) December 12, 2018
And it later turned out, Theresa May survived the leadership challenge by capturing 200 votes, which is more than the needed 158 votes.
Instead of jumping higher, the pound actually encountered selling pressure, likely because of profit-taking. Basically, a “buy the rumor, sell the news” scenario likely played out.
Selling pressure was only limited, though, and GBP bulls tried to send the pound higher again on Thursday.
There were no fresh, positive catalysts, but as noted in Thursday’s London session recap, market analysts were pointing to relief buying after Theresa May survived the leadership challenge, as well as speculative buying before Theresa May meets with E.U. leaders to try and ask for assurances that the backstop solution for the Irish border issue won’t be a trap that will prolong the Brexit process and/or keep the U.K. within the E.U.
And when talks finally got underway, the pound tossed and turned, but bears began to win out since Belgium, Ireland, France, Spain, and Sweden flat out refused to support Theresa May’s plea for assurances, while only Germany and Austria had a conciliatory tone.
However, GBP bears only really started their attack run (except on GBP/AUD and GBP/NZD) when European Commission President Jean-Claude Juncker delivered a statement.
As for some deets, Juncker said that (emphasis mine):
“Our British friends have to tell us what they want, instead of telling us what we want. We often find ourselves in a nebulous, vague debate and it is time we got clarity. Mrs May is fighting hard and bravely but we haven’t seen results. We don’t want the UK to feel there can be any form of renegotiation whatsoever. We can add some clarifications but there will be no renegotiations.”
Juncker also announced that:
“The commission on 19 December will publish all the information that is generally useful for the preparation of a no-deal [Brexit].”
Anyhow, sellers continued to kick the pound lower on Friday. And as noted in Friday’s London session recap, there were no fresh, negative catalysts, but market analysts were still blaming Theresa May’s failure to win legal assurances from the E.U. since that raised political uncertainty and fueled fears of a prolonged Brexit deadlock and higher odds of a “no deal” Brexit.