The British Pound exchange rate has been strengthening in Wednesday’s European session after falling to its lowest level in three years yesterday. Boris Johnson suffered a defeat in the House of Commons on Tuesday night, which has offered the British currency some support as MPs have taken control of the Parliamentary agenda. Today, MPs will vote on whether the possibility of a no-deal Brexit on October 31st can be ruled out–an event which could see the Pound Euro and Pound US Dollar exchange rates supported further.
However, Boris Johnson has threatened to hold a snap election in October should the bill be made into law, and proceeded to kick out 21 Conservative MPs from the Parliamentary party who rebelled against him.
No-Deal Brexit Risk Drives Pound Sterling Exchange Rate
The risk of a no-deal Brexit has been driving a lot of market movement; Goldman Sachs has now placed the chance of a disorderly exit at 25% up from its previous 20% estimate.
Industry expert Ipek Ozkardeskaya commented:
‘It is worth keeping in mind that a snap election is a risky bet for Boris Johnson. If he loses, he will be the shortest-serving PM in the country’s history, and more importantly, the Labour Party would opt for a second Brexit referendum to make sure this is what Brits really, really want. An election as early as next month could give another shake to the Sterling, but even a tiny hope of preventing Johnson from crashing out of the EU without a deal could help the currency.’
The Pound is currently trending 0.93% higher against the US Dollar at 1.2202, while trading 0.52% higher against the Euro at 1.1075.
UK Recession Fears Heighten, Markets Look to BoE’s Inflation Forecasts
British economic data this week has been lacklustre, with the UK’s manufacturing and construction sectors both remaining in contraction territory in August. Today’s service sector data also disappointed–markets keep a close eye on this sector in particular as it makes up the largest part of the UK economy. The Markit Services Purchasing Managers’ Index (PMI) dropped from 51.4 to 50.6 in August, below the 51.0 forecast. The UK economy is faltering as Brexit uncertainty hits businesses and has been registering some of the worst growth since the Global Financial Crisis was in full swing.
Chris Williamson, Chief Business Economist at IHS Markit where the PMIs are produced, said:
‘Business activity in the service sector almost stalled in August as Brexit-related worries escalated, curbing spending by both businesses and consumers. So far this year the services economy has reported its worst performance since 2008, with worrying weakness seen across sectors such as transport, financial services, hotels and restaurants, and business-to-business services. After surveys indicated that both manufacturing and construction remained in deep downturns in August, the lack of any meaningful growth in the service sector raises the likelihood that the UK economy is slipping into recession. The PMI surveys are so far indicating a 0.1% contraction of GDP in the third quarter.’
Markets will be looking towards the Bank if England’s inflation expectations for the next 12 months released on Friday which could influence the British Pound exchange rate.