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30 May 2019

Sterling Struggles as Political Risk Continues to Bite

Although the UK has been in the grips of economic uncertainty for the past three years, the Pound has been bearing up reasonably well, particularly against the Euro. However, the return of political turmoil on Monday led to a flurry of selling momentum for the Pound, which fell over 300 pips during the previous trading week.

The selling momentum returned once again in the early hours of Monday morning, propelled by later newsflow circulating around Prime Minister Theresa May’s potential resignation from office. Sellers were spurred on even more when Labour Leader Jeremy Corbyn announced the breakdown of Brexit discussions, making it doubtful for buyers to be tempted back into the GBP/USD pairing.

EUR/GBP broke above 0.8750 in response to the news early this week, registering a three-month high at 0.8770. Further negative positions in the Pound will be seen as the impetus for prices to stretch towards levels not seen since January 2019 above 0.8850. The EUR/GBP pairing is a bull market despite the less than favourable fundamentals of the EU’s economy, indicating further potential for the pound to slide in the short to medium term.

British Businesses Continue to Suffer

Business leaders warned that the failure of the cross-party talks would likely inflict new damage on the economy, with lingering uncertainty over leaving the EU resulting in firms redirecting investment decisions and orders away from the UK.

Stephen Phipson, chief executive of Make UK, the manufacturing lobby group, said: “The consequences of this [failure] are almost daily announcements of the great damage being done in terms of lost orders and evaporation of confidence in the UK as a place to invest.”

Stockpiling in preparation for a no-deal Brexit has bolstered growth in recent months, while a disruptive exit was avoided in March and April. However, the lack of clarity over the UK’s future trading relationship with the EU has also held the economy back.

Carolyn Fairbairn, director general of the CBI, said: “Another day of failed politics, another dispiriting day for British business. Six wasted weeks while uncertainty paralyses our economy. Business and the country need an urgent resolution to this mess. This is no time for holidays. It’s time to get on with it.”

May’s Final Attempts for Withdrawal Deal Agreement

Theresa May is setting out the details of a series of compromises designed to try and win the support of Labour MPs for her Brexit plan. The cabinet earlier agreed on the idea of a temporary customs relationship until the next general election and measures on the environment and workers’ rights.

These will be included in the Withdrawal Agreement Bill, to be put to a vote in the Commons in early June. The SNP and some Tory Brexiteers have already said they will vote against the Bill. The PM briefed MPs and ministers on the contents of the speech – entitled “A new Brexit deal – seeking common ground in Parliament” – beforehand.

MPs have rejected the withdrawal agreement three times, and talks with Labour on finding a compromise deal acceptable to their MPs broke down last week. Downing Street said there was a “shared determination” in the cabinet to find a way of passing the legislation although it conceded “strong opinions” had been aired on how best to do this.

At the meeting, Mrs May told her ministers: “The Withdrawal Agreement Bill is the vehicle which gets the UK out of the EU and it is vital to find a way to get it over the line.” No 10 said the bill, when it was published, would contain “some significant new aspects”.

International Development Secretary Rory Stewart suggested on Sunday that the government and Labour were “half an inch apart” on key issues and “sensible” Labour MPs could be won round. But shadow foreign secretary Emily Thornberry said she believed her colleagues would vote against the Withdrawal Agreement Bill as she had heard there was “no radical difference” in what was being offered.

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