The pound continued its decline on Monday as investors believe the probability of a hard Brexit has increased ahead of today’s Conservative party election result. With the wider market generally quite calm, uncertainty around the pound exacerbated losses. Boris Johnson remains the favourite to win the leadership election has driven concerns that the UK could leave the EU without a deal in place.
At one point the pound was down 0.2% against the dollar, having lost 1.7% so far this month. This is despite a number of ministers saying they would resign if Johnson won and with a vote in parliament last week making it harder for the next Prime Minister to close down parliament in pursuit of a no-deal.
Some analysts put the probability of a no deal at 30% but the price of the pound in the coming months might reflect more of a 50/50 chance. However, in the short-term the pound is unlikely to drop further as parliament will be in summer recess.
GBPUSD opened at 1.2480 and fell to a midday low of 1.2459, a recovery across the afternoon saw it close exactly where it started, but then proceeded to drop again in the evening.
GBPEUR opened at 1.1123 and followed a similar pattern, reaching a midday low of 1.1112 but closing back where it started. The pair was then stable in the evening.
The dollar and the euro were largely unmoved on Monday as most traders are awaiting decisions from the Federal Reserve and the European Central Bank to see how quickly they will lower interest rates. Traders currently see about a 46% probability that the ECB will lower the interest rate by 10 basis points to -0.50 to try to fight the increased risks of a global trade tensions. The Federal Reserve will have similar motivations to drop interest rates for this first time in a decade.
The Swiss franc has been propelled to a two-year high against the euro while the Japanese yen was largely unchanged following comments from the Bank of Japan Governor that they would continue to monitor the impact of growing global uncertainty.
EURUSD opened at 1.1217 and fairly stable throughout the day, closing almost exactly where it started at 1.1219. Later in the evening the pair dropped to 1.1206 and has continued falling early this morning.
