Less than a week after seeing the pound reach its highest levels for 2019, on Tuesday the pound suffered one of its worst days of the year.

This is as British Prime Minster Boris Johnson announced he was seeking to pass a law that would prevent any further delays to Brexit beyond 2020. Currently the post-Brexit transition period can be extended by up to two years if required and by mutual agreement. Boris Johnson told MPs ‘this would put an end to years of deadlock, dither and delay’.

Brexit Irish border

Commenting on this, Mizuho Securities’ chief currency strategist, Masafumi Yamamoto said, ‘Common sense suggests that crafting a trade deal would take at least more than a year, so markets had assumed that the transition period will be extended.’ It seems like the big majority Johnson won is enabling him to take a hard-line approach, which the market doesn’t like so much. Considering the UK economy looks set to deteriorate, as people and companies start to leave the country because of Brexit, sterling’s short-covering rally is over.

Outside of Brexit news, sterling’s value was also troubled by UK employment data yesterday. This is despite the unemployment rate remaining at a 45-year low, with 24,000 more jobs filled in the 3 months to October.

However, further data showed wage growth has continued to slow, with average earnings only rising by 3.4% a year, down from 3.6% reported last month. This means wages have dropped in the run-up to Christmas, which will have further impact on consumer spending in the UK.

By the end of the day, the pound had lost over 1% value against most major currencies, eradicating all of the post-elections gains.

CPI data for the UK will be released today. Market expectations are to see a reading of 1.7% for Core inflation year-on-year. If the numbers confirmed beat expectations, then this could provide the pound with a welcome boost after Tuesday’s decline. A number below this however could cause further troubles for sterling.

Euro Strengthens, Taking Advantage of Boris’ Hard-Line Brexit Approach

Yesterday the euro was able to take advantage of the pound falling, caused by the hard-line approach to Brexit being taken by Boris Johnson, who now has a strong majority government and more control. Following confirmation of the Tories’ win last week, the euro had weakened to its lowest level against the pound since July 2016, but on Tuesday recovered 1.2% value vs sterling.

The Eurozone economy is closing out 2019 in the midst of its worst spell since 2013, with businesses struggling against the headwinds of near-stagnant demand and gloomy prospects going into 2020. If we are to see further uncertainties in the UK, as Boris Johnson’s hard-line approach is adopted, it could give the euro the opportunity to further gain, if trade talks prove difficult.

German Producer Price Index will feature on Wednesday morning, and if the EU’s largest economy further slumps, then the single currency could surrender further losses. Previous readings showed a contraction of -0.6%, with a slight improvement to -0.4% forecast.

Later in the morning, CPI data for the Eurozone will be released, with forecast numbers at 1.3% year-on-year growth and 1% month-on-month. Any figures below or above forecast could have repercussions for the euro’s immediate value. Be sure to stay in touch with your Account Manager today for updates.

UK Politics Set to Dictate GBP-USD Movements for Rest of This Week

The USD managed to gain over 1% value against the pound yesterday, much owing to sterling’s fall in line with the UK’s impending hard-line Brexit approach. Only on Friday, following the UK election result, the dollar had weakened to its lowest against the pound since May 2018, at 1.3515.

With little significant US data out this week, with the exception of existing home sales, UK politics is likely to continue to dominates headlines and dictate GBP to USD movements.

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