After weeks of stasis, Brexit has finally once again became a fluid situation with market implications. The pound saw heavy, consecutive losses every day of last week as it became clear that Theresa May was losing the last vestiges of her control over the Conservative Party and that a leadership battle would soon ensue.

Friday’s collapse of talks between Labour and May confirmed what markets had been progressively pricing in last week: that May’s final attempt at passing her withdrawal agreement in Parliament was likely to end in failure and resignation.

The two key things to watch this week will be how the chances of May’s deal evolve, and the tone of the simmering battle to replace her.

UK papers are reporting May is preparing her last ditch offer to MPs in talks with both her Cabinet and the opposition this week. A breakthrough can’t be ruled out but looks unlikely at this stage.

Therefore any good news has the potential to give sterling a significant boost to the upside. However, further losses seem more likely as the risks of a no-deal Brexit is likely to be reintroduced during the leadership battle to replace her.

Bookie’s favourite Boris Johnson has leaned heavily on promises he is willing to leave the EU without a deal – as the likelihood of his arrival at No 10 increases, sterling will suffer further.

GBPUSD eyes the 1.25 handle after recent falls due to renewed Brexit risk

Source: Bloomberg


Tory Moderates, EU Elections & UK data

The numbers and resolve of moderate Tories in opposing a no-deal will also be worth watching. Several papers are reporting a “one nation caucus” of cabinet ministers and MPs planning to attempt to block the leadership bids of any candidates proposing to leave the EU without a deal.

The outcome of this week’s European Elections will be important as a bellwether for just how upset voters are with both major parties.

A severe trouncing for the Conservatives at the hands of the Brexit party will likely embolden the no deal faction within the Party’s MPs and make things harder for any nascent opposition to no-deal leadership candidates.

As if politics didn’t provide enough impetus for sterling volatility this week, the data calendar for sterling also offers a number of interesting events.

Senior MPC members including Governor Mark Carney will testify to the Treasury Select Committee on Tuesday at 09:30 BST, on the MPC’s recent inflation report. Later in the week, UK Consumer Price Index data will be out on Wednesday at 09:30 BST, followed by Retail Sales data will be on Friday at the same time.


Author: Ranko Berich, Head of Market Analysis at Monex Europe