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British pound ends the week on a tumultuous note

Jul 18 2018, 05:55 PM (+06) | Orbex.com

Amid a slow start to the trading week, the British pound was in for some unseen volatility. The sterling fell on Monday after news reports that two key officials from the UK government resigned.

The UK's chief Brexit negotiator, David Davis announced his resignation earlier on Monday. The resignation came due to his disapproval of the Brexit terms from PM May.

Later on in the day, the UK's foreign secretary, Boris Johnson also resigned from his post.

Investors were however unsure on how to react. On one hand, the exit of the two key figures marks potential challenges for the current UK administration. On the other hand, this also leaves the way ahead for the UK to negotiate a softer Brexit terms with the EU.

Still, the fact that significant challenges lies ahead for the PM May led administration saw investors selling the sterling.

The pound was seen losing ground strongly against the U.S. dollar and the euro by Monday’s close.

The former chief negotiator, David Davis said that his resignation came due to the fact that he could not support the Brexit plan agreed by the cabinet on Friday, the week before.

According to Davis, the plan led to the Brexit being only in name. His exit was initially cheered by the markets as the British pound rallied. For most investors, Davis' exit from the post suggested that the UK administration will now have to face fewer hurdles.

However, the exit of the foreign minister, Boris Johnson sent the currency plunging as it stoked fears of a possible rebellion within the UK's ruling administration.

Analysts were quick to react to the news. Some expect that a quick replacement could potentially keep the door open for a soft Brexit. This is expected to be a positive for the exchange rate.

But there are also risks that PM May might be forced to resign. The political uncertainty amid this narrative is expected to keep pressure on the currency.

Following the developments, the government bond yields fell 1.28% on the day.

On the economic front, the data from the UK over the week included the release of the monthly GDP report. This was a new monthly GDP release that started. Data showed that the UK’s economy advanced 0.3% on the month.

The preliminary data indicated that the UK’s economy might have rebounded somewhat higher during the second quarter of the year.

Data from the manufacturing, construction and industrial output however showed a mixed set of results. Manufacturing production was seen rising at a slower pace of just 0.4% on the month. This was smaller than the 1.0% gains that were forecast.

Compared to the month before, manufacturing production was somewhat better with the previous month’s numbers being revised to show a 1.3% decline.

Industrial production was seen to be weaker, falling 0.4% and missing estimates of a 0.5% increase. The industrial production numbers were the weakest among the long. Activity in the construction sector however advanced strongly.

Data from ONS showed that construction output jumped 2.9% on the month beating estimates of a 0.4% increase. The previous month’s results were however changed to show a flat reading on the month.

The pound sterling fell to a two week low before recovering by Friday’s close. Price action is expected to continue moving to the upside with the economic data for the week ahead covering the retail sales, inflation and wage growth figures.

 

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