Brexit ‘escape route’ sees pound spike – then slump

Philip McHugh December 5th 2018 - 2 minute read

The pound surged higher on Tuesday morning as investors welcomed suggestions by the European Court of Justice’s (ECJ) Advocate General that the UK could still unilaterally revoke Brexit.

Sterling is stable again this morning, with GBP/EUR flat at €1.1222, GBP/USD muted at $1.2719 and both GBP/CAD and GBP/NZD edging higher to C$1.6891 and NZ$1.8363 respectively, while GBP/AUD surges to AU$1.7431 after a sharp drop in GDP.

Coming up later this morning will be the release of the UK’s latest services PMI, with the pound potentially weakening if growth in the sector slowed last month as expected.

What’s been happening?                                 

The pound initially rallied on Tuesday, enjoying broad gains throughout the morning as markets welcomed the opinion of a senior EU law officer regarding the possibility of the UK reversing Brexit.

In responding to a question from a group of Scottish politicians, the ESJ’s Advocate General, Manuel Campos Sánchez-Bordona gave his opinion that the UK should be able to revoke Article 50 of the Treaty of the European Union without the consent of other EU members, lifting Sterling sentiment on hopes that a Brexit ‘escape route’ remained open to the UK government.

However the pound struggled to sustain these gains to the end of the session, with GBP exchange rates being pressured when the government was found to be in contempt of Parliament for refusing to publish its full legal advice on the UK’s withdrawal deal.

Sterling’s gains against the euro proved be particularly brief, with the GBP/EUR exchange rate sliding in the early afternoon due to a combination of stronger-than-expected Eurozone PPI figures and weakness in the US dollar.

Meanwhile the GBP/USD exchange rate climbed as much as 0.7% yesterday morning as the US dollar faced broad weakness in currency markets amid growing concerns that the Federal Reserve could slow the pace of US rate hikes in 2019.  

However the pairing briefly fell to its lowest levels since mid-2017 later in the session as UK MPs found the government in contempt of Parliament.

What’s coming up?

Looking forward, the Pound may struggle today, with the latest UK services PMI expected to reveal growth in the UK’s largest wealth-generating sector had remained subdued in November.

On top of this the ongoing debate over Theresa May’s Brexit deal will continue throughout Wednesday’s session, potentially prompting further jitters from GBP investors.

Meanwhile, the release of the ISM non-manufacturing PMI is likely to drive momentum in the US dollar this afternoon, with the USD exchange rate potentially strengthening if growth in the US service sector remained robust in November.

Finally, the euro could accelerate this morning following the publication of the Eurozone’s latest retail sales figures, with economists forecasting sales growth will have picked up again in October after stalling the previous month.

Written by
Philip McHugh

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