Monthly wrap: GBP – Pound collapses as no-deal Brexit risks return in force

Key takeaways:

–              Pound nosedives on Brexit uncertainty.
–              Sterling relinquishes gains made on upbeat data.
–              GBP Monthly lows: €1.09, $1.29, AU$1.78, NZ$1.95, C$1.71
–              GBP Monthly highs: €1.12, $1.34, AU$1.84, NZ$2.02, C$1.75
 
The pound experienced significant volatility over the past month as renewed no-deal Brexit jitters quashed a recent recovery in Sterling sentiment.

GBP exchange rates had steadily appreciated through the latter half of August, being spurred higher on the back of some positive UK data releases.

Sterling’s rise was further supported by improving market sentiment and broad weakness in the US dollar, which left investors more willing to speculate on the increasingly risk-sensitive pound.

However, it appears that over optimistic GBP investors may have been burned as the start of September has heralded a sharp Sterling sell-off.

This is being driven by flaring tensions between the UK and EU as Boris Johnson seeks to harden his stance on Brexit.

Recent rhetoric from the UK has played down the chances of a post-Brexit trade deal being reached before the end of 2020. This is a notable departure from the start of summer when the PM proclaimed that a deal could be reached in July, with a ‘bit of oomph’.

Markets have been particularly spooked by the prospect of the UK breaking international law, with Johnson’s plans to override parts of the EU withdrawal deal seen as a major threat to talks.

Looking ahead, Brexit developments will undoubtedly continue to act as the main catalyst of movement in the pound as we approach Boris Johnson’s self-imposed deadline of 15 October.

Considerable downside potential in Sterling will remain if deadlock in talks continues as this will stoke fears of a no-deal Brexit at the end of 2020.

However, the possibility remains that we could see a repeat of last year, with a deal emerging at the eleventh hour as it did with the EU withdrawal deal, the prospect of which could provide the pound with some underlying support.  

Also influencing GBP exchange rates this month will be the Bank of England’s (BoE) latest policy decision. Heightened Brexit uncertainty will likely see the BoE remain in ‘wait and see’ mode this month, but any hints toward negative interest rates in its forward guidance is likely to put pressure on the pound.