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British Pound surges above $1.23 on May Brexit speech

British Pound surges above $1.23 on May Brexit speech

British Prime Minister Theresa May delivered her much-awaited speech on Brexit today. PM May didn’t give much details on the specifics of the Brexit process but she outlined the broader framework for Britain’s departure from the EU.

May stated that Britain does not seek a “partial membership of the European Union, associate membership of the European Union or anything that leaves us (Britain) half in, half out”, making it explicit that her proposal rules out membership in the EU single market.

At the same time, she expressed her desire for an agreement that allows “for the freest possible trade in goods and services between Britain and the EU’s member states” and kept open the possibility of some sort of a customs union deal. More significantly, May said both Houses of Parliament will get to vote on the final deal.

It seems that markets were in need of guidance on Brexit (irrespective of the type of Brexit for now) and the British pound rallied as May brought forward her plans. Sterling strengthened by more than 2%, coming just shy of 1.24 level against the dollar in late European session and making the British currency the biggest major gainer against the greenback. The pound also posted significant gains against the euro, as the single currency dropped to around 0.8650 pounds.

The US dollar remained under pressure on Tuesday with comments by President-elect Donald Trump adding further weight. In an interview for the Wall Street Journal, Trump said the dollar is “too strong” and thus hurting US competitiveness. The dollar index, a gauge of the strength of the US currency relative to the US’s major trading partners, was down at 100.45 in late European session after closing at 101.180 the previous day. Against the yen, the greenback fell to a 7-week low of 112.72.

In economic data releases, UK inflation figures for the month of December were out today. Headline inflation came in at 1.6% year-on-year, beating expectations of 1.4% and was up on the previous month’s figure of 1.2%. Core inflation also accelerated to 1.6% y/y, again higher than the expected and November’s number of 1.4%. The rise in headline inflation constitutes the strongest rise in 2½- years, an increase fuelled by the sharp decline in sterling on worries over the effects of Brexit on the UK economy (oil prices not falling as much as in December last year also played its part).

Eurozone data today comprised the ZEW business survey out of Germany. The ZEW economic sentiment index jumped to 16.6 in January – the highest since June, before the Brexit vote. However, this was below forecasts of 18.3. The ZEW current conditions index beat estimates though, as it rose from 63.5 to 77.3 in January, versus expectations of 65.0. The survey suggests the strong growth momentum at the end of 2016 is holding up going into the New Year. The data had little impact on the euro, which was mostly driven by dollar and pound moves. The single currency hit a 5½-week high of 1.0719 dollars in today’s European session.

The New Zealand dollar was another big gainer today, as apart from the weaker greenback, it found additional support by higher dairy prices. Global dairy prices rose by 0.6% in the latest bi-weekly auction, following a 3.9% drop in the previous auction. NZDUSD is currently up around 1.3% at 0.7191.

Gold’s safe-haven status allowed it to continue its advance on ongoing fears over Brexit and President-elect Donald Trump’s policies. The precious metal reached an 8-week high of approximately $1219 an ounce before settling around $1214 towards the end of the European session.

by XM Investment Research Desk

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