IFX Market Report: Wednesday 22nd May 2019

The pound fell below $1.27 yesterday for the first time since mid-January, driven down by broad dollar strength and increasing fears that Prime Minister Theresa May will fail to convince her colleagues to back her amended version of the EU withdrawal deal. Uncertainty has grown in the last week as cross-party Brexit talks broke down.

In an attempt break the stalemate, May revealed an amended Brexit deal which offers the prospect of a vote on a second referendum. In a statement yesterday, May said that failing to pass the bill would result in either a general election or a second referendum.

If the deal is rejected again, she will likely be replaced with a more hard-line Brexit PM such as Boris Johnson. Some media reports have stated the government was prepared for resignations after the cabinet meeting where May would ask ministers to back concessions to Labour to get her deal through parliament. Pro-Brexit Conservatives will likely reject any deal that appears to soften the proposal, particularly to do with a customs union. Although the course of events seems to be mapped out already, a continuing drop in the pound on increased fears of a no deal Brexit is likely.

GBPUSD opened at 1.2698 and drifted down to a 4-month low of 1.2683 but rose sharply in the afternoon by nearly a cent as investor pounced on hopes of a second referendum. The pound closed at 1.2744 ending 11 days of daily declines.

GBPEUR opened at 1.1382 and followed a similar pattern, briefly hitting a high of 1.1433 before closing at 1.1408

The US dollar was higher against the euro and the yen on Tuesday as President Donald Trump temporarily eased restrictions on China’s Huawei Technologies Co Ltd. Yesterday proved to be a more risk-on day of trading after last weeks’ blacklisting of the technology firm which led to several companies suspending business with them. The dollar was 0.5% stronger against the yen and dollar index was 0.12% higher.

The euro came under pressure because of uncertainty surrounding the upcoming EU elections which is looking as if the eurosceptic parties will perform well in many parts of the continent.

EURUSD opened at 1.1156 and rose gradually through the morning and early afternoon before jumping to a high of 1.1179 and closing slightly lower at 1.1161.

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