Pound weakens as Corbyn outmanoeuvres Conservatives on Brexit

A new Brexit speech from Labour leader Jeremy Corbyn has thrown a spanner in the works after he announced that he supported some form of customs union between the UK and EU; a proposal that won the cautious support of many in the UK’s private sector.

The pound is largely on solid form this morning. The GBP/EUR exchange rate is flat at €1.1331, but GBP/USD is up 0.2% to US$1.3988. The pound is up 0.2% against the commodity trio, with GBP/AUD at AU$1.7817, GBP/NZD at NZ$1.9183, and GBP/CAD at C$1.7739.

Keep reading to see why a more upbeat attitude from a Bank of England (BoE) policymaker yesterday failed to support GBP exchange rates for long…

What’s been happening?

The pound received an early boost but later sunk below opening levels yesterday.

Markets were cheered by comments from newest member of the Monetary Policy Committee (MPC) Sir David Ramsden, who said his outlook on interest rates has changed and he now saw a case for hiking borrowing costs ‘somewhat sooner rather than somewhat later’.

But any GBP strength was lost later in the day after Labour Party leader Jeremy Corbyn gave a speech on Brexit and called for the formation of a new customs union between the UK and the EU.

This is being seen as a bid to outflank the Conservatives, whose leadership seems intent on pursuing a ‘Hard Brexit’ largely due to the influence of key leave figures such as Boris Johnson and Michael Gove in the Cabinet.

With Theresa May’s grip on power still weak, any development that sees support for the Labour Party increase is going to unsettle markets.

The euro was able to rise against the pound yesterday, despite the best efforts of European Central Bank (ECB) President Mario Draghi calling for patience from markets regarding monetary policy adjustments.

Draghi claimed that loose stimulus was still necessary and that it would be a long time before inflation reached the ECB target. But markets were not buying into it, with Draghi’s comments seeming more like a desperate effort to hold back the tide of growing optimism over the Eurozone economy.

While the US dollar was soft overall, the GBP/USD exchange rate still weakened.

Federal Reserve official James Bullard issued a cautious warning over the future of interest rate hikes, claiming that tightening monetary policy too much further risks ending up with overly high interest rates that damage the economy.

What’s coming up?

Pound Sterling could be on the back foot today against the euro and US dollar, with the only development on the UK economic calendar being a speech from Bank of England official Sam Woods, who is not a member of the Monetary Policy Committee. He is likely to talk on the subject of Prudential Regulation.

GBP/EUR could receive a boost from today’s upcoming German consumer price index figures for February, which are preliminarily expected to show a slight slowdown in year-on-year price growth from 1.6% to 1.5%.

Meanwhile, GBP/USD is slightly harder to predict, given the forecasts for today’s data – the advance goods trade balance and durable goods orders for January, and consumer confidence index for February – are largely gloomy, but there will also be the release of new Federal Reserve Chair Jerome Powell’s Congressional Testimony, and a second testimony before the House Financial Services Committee to pay attention to.