Home Brexit Pound nears three-month low amid Brexit uncertainty, slow GDP growth

Pound nears three-month low amid Brexit uncertainty, slow GDP growth

by Purvai Dua
10th Dec 18 10:46 am
The pound is trading 0.10 per cent below against the dollar at $1.2720 following news that GDP growth in the three months to October slowed to 0.4 percent from an unusually robust 0.6 percent in the third quarter of 2018, according to the Office for National Statistics.

The pound is currently near three-month low against the euro as traders are trying to predict how the currency would react if May loses the vote and scenarios include a no-deal Brexit, a renegotiated deal and a second referendum.
Simon Harvey, Market Analyst at Monex Europe, commented: ‘As Theresa May attempts to navigate her deal through Parliament, financial market volatility will likely rise:  
• It remains our base case that May’s current deal will be marginally rejected by Parliament tomorrow, prompting a fall in sterling to the 1.25 level. The market reaction will be dependent on the magnitude of the defeat, as opposed to the defeat itself, in an attempt to try and predict the next steps for Government. Therefore, the way the numbers stack up is of high importance. Should the deal be shot down by less than 40 votes, a fudge of the current deal in areas such as the transition period and the Irish backstop will likely ensue before a second running through Westminster. In our view, this is the likeliest scenario and would see much of the uncertainty pushed into the new year while investors mull over the possibility of a deal being salvaged during Parliament’s recess. 
• Should the deal be rejected with a large majority, which remains a credible risk, the prospects of the March deadline being pushed back, a second referendum and even a change of government creep back into the picture. This could be done in a multitude of ways such as a vote of confidence triggered by Labour, a vote of no confidence within the Tory party, or even a resignation from Theresa May. With further uncertainty added to the UK economy, and to the Brexit process, the pound’s kneejerk reaction could see it break the 1.20 level and may even go as low as 2016’s 1.1841. 
• The possibility of the deal being forced through parliament cannot be written off though. We believe the chances of this are around 10%. Should the deal sail through Parliament, it would prompt 5-6% rally in sterling as markets react favourably to a soft Brexit. The stage is then handed back to the UK economy and the Bank of England to dictate sterling’s price action whilst UK and EU negotiators iron out the minutiae of the deal in the transition period. 
• With so many possible scenarios, the only certainty this week is increased volatility in foreign exchange markets. If either a whitewash or a victory is dealt to May’s government next week, the effects would not be contained in sterling crosses.’

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