Pound weakened by Hammond’s refusal to budget for ‘no deal’ Brexit

Further signs that the UK government was divided in its approach to Brexit weakened the pound yesterday.

Sterling is moving sluggishly today ahead of the Bank of England (BoE) survey data set for release soon. GBP/EUR is currently trending at €1.1157, while GBP/USD is at US$1.3242. GBP/AUD has slipped to A$1.6928, GBP/NZD to NZ$1.8620, and GBP/CAD to C$1.6468.

It’s all about monetary policy outlooks today. Find out why below…

What’s been happening?

There was no economic data for the UK released yesterday, but the pound was falling nonetheless.

This was largely because Chancellor Philip Hammond had stymied Prime Minister Theresa May’s plans to begin building up infrastructure in preparation for a ‘no deal’ Brexit, should the UK government be unable to get the stalled exit negotiations back on track.

May had claimed the government would increase fiscal spending to develop projects including improved IT systems and lorry parks near Dover. But Hammond refused to budget for the additional costs, stating in an article for The Times that he would only increase spending when it was ‘responsible to do so’.

Markets weren’t particularly encouraged by the signs the UK is heading for a cliff-edge Brexit while simultaneously refusing to do anything to mitigate the potential negative effects of such an outcome. The pound accordingly edged lower across the board.

GBP/EUR losses were enhanced by retreating market fears over the situation in Catalonia. The region’s President did indeed declare independence from Spain on Tuesday evening (as many suspected he would) yet he also announced the move would be postponed by several weeks so that the Spanish government had time to negotiate.

This presents the Spanish government with an opportunity to come up with a deal that would incentivise Catalonia to remain part of the nation.

The US dollar, meanwhile, was able to hold just above opening levels versus the pound, although it was weakening elsewhere. The approach of Federal Open Market Committee (FOMC) meeting minutes for September kept the markets on edge as they waited for fresh clues regarding the likely future path of US interest rates.

What's coming up?

Today’s Bank of England (BoE) credit conditions and bank liabilities survey could help boost the odds of a near-term interest rate hike if the findings show the financial system is strong enough to support higher borrowing costs.

Meanwhile the Eurozone monetary policy outlook could also shift after a panel appearance by European Central Bank (ECB) President Mario Draghi in Washington.

The fallout from the latest FOMC minutes could keep USD volatile for the rest of today, although there is also jobless claims data and speeches by Fed officials Powell and Brainard on the calendar.

We’re here to talk currency whenever you need us, so get in touch if you want to know more about the latest news or how it could impact your currency transfers.

Phil McHugh,
Trading Floor Manager

Phil provides dealing and hedging services whilst also helping to manage Currencies Direct overall market exposure.