Pound Jumps on May's Brexit Gamble; Service PMIs Eyed

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The British pound is back at its highest levels in a week in early trading in Europe on Wednesday after signs of a possible breakthrough on Brexit At 04:00 AM ET (0800 GMT), the pound was at $1.3186, up around 0.5% from late Tuesday levels. The euro traded at 0.8505 pounds, down some 0.3% from late on Tuesday. U.K. Prime Minister Theresa May offered talks to opposition leader Jeremy Corbyn to ensure an orderly and negotiated departure from the European Union, rather than give in to lawmakers on her own side who are ready to accept the consequences of a disorderly Brexit without transitional arrangements. Corbyn’s position is that a permanent customs union with the EU is a prerequisite for Brexit, representing the best guarantee that trade with the EU would continue without friction. May’s own party, and May herself, have argued that it denies the U.K. an independent trade policy, one of the chief reasons for Brexit in the first place.

Nordea Markets analysts argued that the market is already pricing in a nine-month extension to the Brexit process, which leads them to believe that the risks to sterling are mainly downwards now.

“The GBP is though already close to fair value in case of a deal,” wrote Andrea Steno Larsen and Morten Lund. “We believe that the GBP could weaken over the following 3-6 months” in the base case. In case of the ‘no-deal’ tail risk materializing, the euro could rise as high as 0.95, they added.

Meanwhile, the dollar index, which measures the greenback against a basket of six major currencies, was back down at 96.74, having risen as far as 97.08 before the news from London. The dollar strengthened against the yen but fell against the Aussie and kiwi after fresh reports alleging progress in trade talks between the U.S. and China. News of a sharp rise in China’s services purchasing managers’ index, which hit its highest level in 14 months, also supported risk appetite, raising hopes that the worst of China’s slowdown is over. Similar PMIs from Europe will offer the next test of sentiment toward the euro, with a reading for the euro area due at 04:00 AM ET (08:00 GMT).

Source: Investing.com

Daniel PerkinsComment