Pound Down As Cross-Party Brexit Talks Fail To Go Forward

Pound Down As Cross-Party Brexit Talks Fail To Go Forward
May 15, 2019

 

The pound continued to fall against its competitors yesterday after the UK’s Shadow Chancellor of the Exchequer, John McDonnell, stated that there are no significant changes so far in the cross-party Brexit talks. Soft job data also encouraged traders to sell the pound. News of an abrupt halt to trade talks between the US and China have also forced investors to stay away from riskier assets. From a high of 1.3030, the GBP/USD pair has declined to 1.2880 in the past 24 hours.

The shadow chancellor stated that Labor is yet to witness any kind of credible moves from ministers, particularly on the problem of customs union with the EU. McDonnell said, “We’re not near what we want.” McDonnell stressed that Labour had “compromised in some areas.”

After Theresa May’s Brexit deal got rejected thrice by the Parliament, both ruling and opposition parties went back to the negotiating table to arrive at a compromise. The failure to break the jinx led the country to postpone its March 29th deadline, for departing from the EU to October 31st. The Labour party wish to have a permanent, all-inclusive customs union with the EU after Brexit, in line with the single market.  With such a Brexit deal in place, the UK will not be able to finalize its own goods related trade agreements with other countries across the globe. The delays in arriving at a compromise keep the pound weak.

The economic data released yesterday was also not impressive. UK unemployment declined to 1.3 million in the first quarter of 2019. The number of unemployed people fell by 65,000 in 2019, taking the unemployment rate to a 44-year low of 3.8%.

Annual wage growth declined to 3.2% in the quarter ended March, compared with 3.5% in the earlier month, according to the Office for National Statistics (ONS). Even though pay hikes are higher than increasing prices, analysts are worried that the gap is narrowing. In March, the average salary rose by 2.3% compared with last year. The prevailing inflation is 1.9% which implies a real wage increase of only 0.4%.

Economists warn that a further wage increase is possible only if the economy becomes more productive.  Notably, the ONS report also indicates that the amount each worker produces per hour has declined for the third successive month. A slowdown in wage growth and cuts to work-related benefits has left 4 million people in poverty.

Regarding the low productivity, Ben Brettell, senior economist at Hargreaves Lansdown, said: “The ‘British disease’ of low productivity is a specter which continues to haunt us.”

Simon Harvey, a currency strategist with Monex Europe, opined that the data would damp expectations for an interest rate hike.

Echoing similar thoughts, Joe Manimbo, a currency strategist with Western Union, said: “Sterling took its main cue from the lacklustre side of mixed U.K. jobs data. On the bright side, U.K. unemployment fell to fresh multi-decade lows of 3.8%. But wage growth moderated more than expected to 3.2% from 3.5% the previous period. Slower wage growth reduces the likelihood of a Pound-positive hike in British interest rates later this year.”

Trade negotiations between the US and China have come to a stop, sources close to the talks suggest, even as President Donald Trump is optimistic about new taxes that have derailed markets and increased disagreements. After the financial markets slumped on Monday, Trump opined that both parties could ink a deal within a month.

Speaking to reporters at the White House, Trump said: “We’ll let you know in three or four weeks if it’s successful.”

There are, however, few government authorities who believe that the time frame given by Trump is real, at least before it becomes evident where discussions are leading once policymakers get back to the negotiating table. Either the Chinese will have to accept to modify certain regulations linked to their business activities, or the US will have to dampen its expectations.

The pound is expected to stabilize only after the cross-party discussions lead to a compromise.

The historical price chart indicates that the GBP/USD pair is moving along a descending channel as shown in the image below. The MACD indicator has a negative reading. As a result, we can expect the currency pair to remain bearish in the short-term.

GBP - technical analysis - 15th May 2019

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Andrew Wright

Prior to founding tradersasset.com in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.


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