Pound Sterling Steadies vs. Euro, Dollar Following Monday's Drop on Data + Brexit Combo

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- Pound Sterling steadies following sharp drop at start of the new week

- Manufacturing PMI number miss expectations, eyes on construction PMI Tuesday

- May's Brexit plans facing increasing opposition from all sides

The British Pound is steadying following a poor start to the new week that saw it underperform major rivals on a slew of negative Brexit headlines and a below-expectation manufacturing data release.

Tuesday sees the release of construction PMI at 09:30 B.S.T. and markets will be expecting a reading of 54.9 for August, down from 55.8 in July.

Politicians are back to work from their summer holidays today, and stealing the limelight from a currency perspective is the appearance of Bank of England Governor Mark Carney before the Treasury Select Committee.

Carney will appear before lawmakers alongside Andy Haldane, Michael Saunders and Silvana Tenreyro at 13:15 B.S.T and give testimony on various issues of monetary policy, and any guidance on future interest rate moves could interest markets.

 

UK Economy Could be Slowing

The manufacturing PMI for August read at 52.8, below market expectations for a number of 53.9; the data suggesting the sector is cooling much faster than many had anticipated.

According to IHS Markit, compilers of the report:

"August saw further signs of slowdown in the UK manufacturing sector. Rates of expansion in output and new orders eased following the first contraction in new export business for over two years. The subdued performance of the sector also transmitted itself to the labour market, with the pace of manufacturing job creation slumping to near-stagnation."

It would also appear that a global slowdown is starting to make its presence felt:

"Foreign demand decreased for the first time since April 2016, despite the continued relative weakness of the sterling exchange rate. Some firms linked lower inflows of new work from abroad to the recent weaker pace of expansion of the world economy."

But analyst Sreekala Kochugovindan at Barclays in London says there are signs ongoing anxieties concerning a Brexit 'no deal' are also at play.

"The summer 'no-deal' Brexit rhetoric may have weighed on sentiment as manufacturing activity continued to ease in August. The main drag came from export orders which contracted for the first time in two years to reach the weakest level since Q4 2014. Employment slowed and is now only marginally within expansionary territory. Meanwhile, input price pressures remain elevated as metal price rises fed through," says the analyst in a reaction to the data.

Following the numbers we are quoting the Pound-to-Euro exchange rate 0.40% lower at 1.1079 and the Pound-to-Dollar exchange rate 0.30% lower at 1.2884.

"Early UK PMI for August coming in week against a more GBP bearish political background following weekend Brexit comments from both Barnier and May," notes Neil Jones, a foreign exchange dealer with Mizuho Bank Ltd. in London who says this "should push GBP lower."

 

Barnier will Push the UK's Position to the Limit

Over the weekend chief EU Brexit negotiator Michel barrier indicated he is "strongly opposed" to Theresa May's Chequers plan, saying it would ultimately end the current structure of the EU.

Barnier believes May's plans for a common standards rule book on EU-UK goods is akin to the UK staying in the single-market via the back-door.

Above: Michel Barnier withdraws his previous apparently constructive tone regarding Brexit negotiations. Image © European Union, 2018  / Source: EC - Audiovisual Service

The comments come a mere number of days following more constructive comments from Barnier in which he hinted at a generous EU-UK trade deal of unprecedented scope.

Sterling rose on those comments, and it appears on Monday what Barnier giveth, Barnier taketh.

"The Brexit optimism of last week has been predictably fleeting, with Barnier ripping Theresa May’s Chequers plans into shreds despite hopes that Friday’s meeting with Raab would herald a significant breakthrough in talks," says Joshua Mahony, Market Analyst at brokers IG. "Unfortunately, history has taught us to be sceptical of any perceived progress, and once again we find ourselves back to square one with no significant headway made on anything apart from the amount we would pay the EU to leave."

Domestic politics are also a cause for concern ahead of Tuesday's opening of parliament amidst signs a number of Conservative party Members of Parliament will fight hard to reject May's current Brexit blueprint.

The Times reports so-called 'Brexit rebels' including the former ministers Priti Patel and Iain Duncan Smith, joined the Stand Up 4 Brexit group, a grassroots campaign that commits supporters to ripping up the EU negotiations to date.

Owing to May's small parliamentary majority, she is vulnerable to parliamentary defeat if more than seven Tory MPs decide to oppose her.

Brexiteers say that they have 60 or more MPs on their side but most are unwilling yet to go public.

David Davis, the former Brexit secretary, also promised yesterday to vote against May’s plan, describing it as “actually almost worse than being in”.

The Times adds Brexiteers say they will put forward alternative proposals within weeks.

Between those UK politicians opposed to May's Chequers plan, and Barnier's opposition to the same plan, it is hard to see how any kind of Brexit deal will be achieved by the November deadline. 

What is increasingly likely is that some form of withdrawal agreement will be achieved to allow the progression of the relationship into the 2-year bridging period that kicks in on Brexit day which is March 29, 2019.

In all likelihood further rounds of negotiations on the future trading relationship will be agreed.

"Contrary to the ‘No-Deal’ rhetoric, we believe that an agreement on an orderly withdrawal is actually within reach, even though the path to it may be blurred by negotiation tactics between London and Brussels but also between the government and parliament," says Fabrice Montagne with Barclays in London.

Montagne says if no agreement is reached by the end of this year, we should expect the UK and EU to discuss an extension: that would eventually require a unanimous vote by the EU 27 council (ie, Heads of State and government) and approval by the UK government.

"The conditions of an extension could vary materially from granting extra time to agree a deal or preparing for a chaotic ‘No-Deal’ Brexit if both sides acknowledge the impossibility of finding common ground," adds Montagne.

While this avoids a 'cliff-edge' Brexit scenario it does extend the current period of uncertainty well into 2019.

And, Sterling despises uncertainty.

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