The British pound recorded new weekly lows against the greenback yesterday, mainly because of rumors that talks between the UK government and the opposition party have come to a halt. The sell-off was also aided by the Labour Party leader Jeremy Corbyn’s statement that a deal is yet to be made on the customs union with the EU. In the past 24 hours, the GBP/USD currency pair has declined from a high of 1.3085 to a low of 1.3017, before recovering to 1.3045 levels at the time of writing this article.
Strong labor market fails to strengthen the pound
In the early London session yesterday, the UK Office for National Statistics published an upbeat labor market overview for April. Both headline and core average weekly earnings for February came in as per economists’ forecast of 3.5% and 3.4% respectively.
Regarding the job market, Matt Hughes, ONS deputy head of labor market statistics, said: “The jobs market remains robust, with the number of people in work continuing to grow. The increase over the past year is all coming from full-timers, both employees and the self-employed.”
Even though the employment growth was robust, Thomas Pugh, an economist at Capital Economics, doubt that this “could mark the peak of employment growth as the Brexit uncertainty reached its crescendo,” as the recent poll results indicate a sharp downturn in March.
In the case of Brexit, an extension to Article 50 was accepted earlier this month, implying the UK will remain in the EU until the 31st of October, unless the Brexit agreement is passed in the UK Parliament sooner. Major think tanks believe that Theresa May has “no chance” of getting her Brexit deal endorsed in May and stay out of the European Parliament elections.
Regarding the probability of passing the Brexit bill in May, Joe Owen, program director at the Institute for Government, said: “It looks highly unlikely the government will be able to pass the (Withdrawal Agreement) Bill by the end of May, given the political challenge facing the prime minister.”
Underlining the pile of issues surrounding the Brexit agreement, the Irish backstop and safeguarding the rights of EU citizens, Owen said: “All of these things will be open to amendment by backbenchers.”
Likewise, Dr. Alan Wager, a UK researcher working for Changing Europe, said: “It’s likely to take several months to pass the bill, given how long comparable legislation has taken to pass historically. Looking at the window before the European elections – which is three weeks maximum [after the Easter recess] – there is no way MPs are going to agree to that, no chance of that whatsoever.”
Jeremy Corbyn‘s statement regarding the absence of understanding on a customs union with the EU pushed the GBP/USD pair lower even though his spokesman contradicted the news of halted discussions between Theresa May‘s government and the opposition party.
In the US, the Dollar Index (DXY), which reflects the strength of the greenback, hit a five day high of 97.08.
The Brexit uncertainty is expected to keep the pound weak in the near-term.
Technically, the GBP/USD pair is moving within the descending channel, with the money flow indicator having a reading below 50. As a result, we can expect the downtrend to continue in the short-term.
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