The British pound receded following an election spurt as the reality of the tough Brexit road kicks in.
The British pound (GBP) has given back all of its election night gains in a sharp fall Tuesday after Prime Minister Boris Johnson pledged that he wouldn't extend the transition period. GBP is trading below 1.31 after UK October CPI remained unchanged at 1.5% year over year and core at 1.7%. Eurozone Oct CPI stood unchanged at 1.3%. Canadian CPI is due up next.
The market honeymoon for Conservatives abruptly ended Tuesday after the party said it would add a new clause to the Brexit bill that would rule out any extension to the transition period beyond Dec. 31, 2020.
That will leave the EU and UK just 11 months to negotiate a new trading relationship. Johnson insists that the existing relationship makes that a realistic deadline but EU officials point to the seven years it took to negotiate the Canada-EU pact as evidence it will take longer. Michel Barnier, the EUs Chief Negotiator for the UK, was recorded telling Members of the European Parliament earlier this month that at best the timeline would mean a bare-bones agreement.
The Cable fell more than 200 pips on the news and is now at 1.3090s, almost precisely where it was before the election exit poll was published.
There was a slice of good news on the GBP front early in Asia as both S&P and Fitch upgraded their UK outlook to stable from negative on falling hard Brexit risks. Interestingly, S&P saw "receding" risk of no deal, expecting an "extension to transition period beyond December 2020.”
Both agencies stated that Johnson would eventually extend the transition period. Eyes turn towards Thursday's Bank of England’s take on the post-election climate and Friday's discussion of the Brexit transition period in Parliament.
Aside from the pound, economic news was light but generally positive. U.S. industrial production, housing starts and JOLTS all beat estimates. In markets, oil continued to make fresh post-Saudi attack highs. Another profit warning from FedEx will be seen how it impacts Dow Transports.
Looking ahead, the economic calendar is important for the Canadian dollar including CPI, house price data and weekly oil inventories. Canada is one of the few countries with above-target inflation and might be the canary in the global coalmine if prices start to run. The consensus for Wednesday's report is +2.2% on the core and +1.9%-+2.2% on the three core measures. So far, inflation hasn't captured the market's attention but a further rise might change that.
Adam Button is co-owner and managing director of ForexLive.com and a contributor at AshrafLaidi.com. You can see Ashraf’s daily analysis at www.AshrafLaidi.com and sign up for the Premium Insights. Ashraf's Tweet on indices here.
