Pound struggles amid Brexit and growth fears. USD strong following jobs report

Jul 9, 2019

Sterling continues to struggle as uncertainty over Brexit continues to take its toll and concerns over the British economy rise.

Both of the two Tory leadership candidates have indicated that they would be prepared to leave the EU without a deal if necessary. Boris Johnson, the clear favourite, has taken an even firmer stance and promised to leave no matter what by the 31st October. Consequently, the market have been pricing in higher odds of a disruptive exit from the EU which continues to put pressure on the Pound.

Further clouds over Sterling have been accumulating as recent economic data releases have been flagging. Bleak retail sales figures out this morning have shown a large drop in spending as Brexit concerns put consumers off non-essential purchases.

After remaining fairly resilient since the Brexit vote, the UK economy is showing signs of a larger slowdown. The latest Bloomberg forecasts of economists predicts that the economy will shrink by 0.1% in the second quarter which would be the first contraction since 2012!

Most of this can be attributed to Brexit, but there are also other major global events impacting on our growth (including the US-China trade war and the slowdown in Eurozone). The weaker UK data has increased speculation that the Bank of England might join other major central bank in easing monetary policy which is negative for Sterling.

Over the past couple of weeks the USD had started to show signs of being on the back foot as traders predicted an interest rate cut from the Fed this month. Following strong US job figures on Friday, however, the market are now becoming more sceptical over this and have reduced the odds of a cut this month (still a high chance of 0.25% cut but they’ve ruled out a 0.5% cut). This has caused traders to reallocate funds from elsewhere back into the Greenback.

As a result – other than a brief blip in January – the GBP/USD has moved to the lowest levels since April 2017. The GBP/EUR continues to trade around the lowest levels of the year.

Overall, as things stand, there is little reason to buy the Pound. To make any major gains we will need to see some positive Brexit developments and it’s unlikely anything will progress on this side until the new PM comes in towards the end of July. Therefore, in the short-term, any boosts in Sterling crosses are likely to come from weakness in other currencies and are generally expected to be short-lived.