The pound posted its fourth straight monthly decline versus the euro in August and the outlook for September may not be much rosier.
Sterling concluded a second weekly advance against the dollar Friday. Still, that wasn’t enough to prevent its steepest monthly drop versus the US currency since October last month as progress on Brexit talks between the UK and the European Union ground to a near standstill, ending in acrimony on August 31.
With Parliament returning from its summer recess this week, Prime Minister Theresa May will have to bring the members of her Conservative cabinet onto the same page in order to prevent further declines in the currency.
“It has become obvious that there are not only big differences in the views on Brexit between the Tories and opposition Labour party, but within the Conservative Party as well,” said Thu Lan Nguyen, a foreign-exchange strategist at Commerzbank AG in Frankfurt. “If the British government is unable to deliver clarity, that’s likely to increase unease among pound investors.”
The next few weeks could be crucial for the UK currency, with two more rounds of negotiations with the EU slated before the bloc’s summit in Brussels on October 19. Sufficient progress - including the settlement of the divorce bill - will have to be made before the two sides move on to discussing a future trade deal.
Low Volatility
Other factors are also in play. Traders are reacting more to Bank of England interest-rate expectations and economic data, deadening some Brexit headlines. Three-month implied volatility in sterling is the lowest among the Group-of-10 currencies, with the spread versus one-year volatility widening since June as investors push the risk of price swings further out.
The pound was little changed at $1.2940 as of 10:44 am London time, having fallen 2.2% against the dollar in August. The euro rose 0.5% to 92.07 pence, having climbed 2.8% last month and reached 93.07 pence on August 29, its highest level since October 7.
This week also sees a spate of UK data, with focus likely to be on IHS Markit’s services Purchasing Managers Index, which measures the largest part of the economy, due September 5. The figures come after data released on September 1 showed manufacturing expanded at the fastest pace in four months in August. In contrast, construction growth slowed last month to its weakest in a year in data published Monday.
Nomura International said it’s still short the pound, particularly against the euro as the market retains its “Brexit bias,” according to London-based strategist Jordan Rochester. Even though the UK has scaled back its hard-line position on issues such as the European Court of Justice having jurisdiction in the U.K. and payment of a divorce bill, Rochester said that the EU has proven unreceptive, meaning even positive economic data may not be enough to prompt a rally in sterling.
“So far it’s been the UK mostly negotiating with itself over what it wants,” he said. “It’s still a tricky market to be long on sterling.”
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