Pound-Euro Falls Through Key Support Line Amidst Slew of Negative Headlines

Exchange rates

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- Pound-Euro breaks below key level

- Sell-off comes amidst heightened 'no deal' Brexit expectations

- Strong UK wage data unable to support Sterling

The British Pound is under a fresh assault from the Euro, with the GBP/EUR exchange rate breaking down to a fresh 2019 low at 1.1058 on Tuesday, July 16 with markets fixating on a spike in expectations for a 'no deal' Brexit on October 31.

Declines come after Boris Johnson - the front-runner to replace Prime Minister Theresa May at the end of this month - told a leadership debate that he would look to get rid of the Northern Ireland backstop contained in the Brexit deal struck between the EU and UK. 

The Pound's sell-off then gained traction through the London afternoon session as reports emerged that 'Team Johnson' was seriously considering suspending parliament ahead of the Brexit deadline to ensure MPs failed to prevent a 'no deal'.

According to reports, Johnson could seek to suspend Parliament for two weeks in October with members of his campaign saying they would look to schedule a Queen's Speech to mark the start of a new parliamentary session in early November.

Parliament is usually 'out of session' for between one and two weeks ahead of a Queen's speech, meaning MPs would in effect be unavailable to stop a no-deal Brexit immediately before October 31.

The reports suggest Johnson is serious about a 'no deal' Brexit and it represents the first time that a clear strategy to achieving such an outcome has been aired.

The Pound had been under pressure from early on in the day as markets digested the outcome of a the final leadership debate between Johnson and Jeremy Hunt, in which Johnson said the so-called Irish backstop was in fact devised by UK negotiators, and not counterparts in the EU or Ireland.

"The problem is very fundamental. It has been devised by our own country as an instrument of incarceration," said Johnson.

The backstop is seen as being the single most important stumbling block to the current deal being voted through parliament, and EU leaders have time and again insisted that any new deal would have to contain the backstop.

Johnson is making it clear that he will not accept the mechanism, and it is therefore dawning on markets that the EU and UK might simply be unable to come to a negotiated settlement.

The Pound is feeling the heat as a result of markets increasing their bets for a 'no deal' Brexit.

The Pound declined "after both Prime Ministerial candidate’s Boris Johnson and Jeremy Hunt said the Irish backstop has to be abolished. Presumably, this would be the ”proposal” in any new deal presented to the EU," says Richard Grace, a currency strategist with CBA. "The implications are that the chances of a no‑deal hard Brexit have lifted or Northern Ireland remains with EU rules."

The GBP/EUR appears to have broken below a key level of support located at 1.11: this technical breakdown could well explain the sudden fall in the exchange rate seen over the course of London morning trade.

Strong support level breaks

Above: A strong level of support is found at 1.11: a breakdown in support opens the door to a quick fall lower.

Robin Wilkin, a cross-asset strategist with Lloyds Bank says he is watching for a "clear break and close" below 1.0970 as this would take the exchange rate into a new 'bear' dynamic.

Options analyst Peter Stoneham at Thomson Reuters says there is "a risk we go sideways" as long as the market stays above 1.11.

However, he says the Euro's "long-term bull run will not roll over" and he prefers buying the Euro on any weakness in anticipation.

"Central bank policy and Brexit uncertainty is gripping the cross," says Stoneham who says "this week likely to be pivotal" for the exchange rate.

The Pound has struggled over recent weeks as political uncertainty spiked in the wake of Prime Minister Theresa May's resignation while expectations for a 'no deal' Brexit have risen as May's likely replacement, Boris Johnson, has pledged to take the UK out of the EU "do or die" on October 31. Adding to the Pound's woes is a clear slowdown in UK economic growth, which have lead markets to increase bets that an interest rate cut at the Bank of England is possible in coming months.

"GBP is clearly vulnerable against a backdrop of political uncertainty and a deteriorating UK economic environment," says Jane Foley, a foreign exchange strategist with Rabobank. "The Brexit outcome and politics developments remain the largest driving factor for GBP."

Rabobank are forecasting the GBP/EUR exchange rate to be at 1.11 in three months, but a resolution to the ongoing chronic political uncertainty should see Sterling to recover with the exchange rate forecast at 1.16 in six months.

The declines in Sterling come despite some better-than-forecast wage data being reported by the ONS, numbers that would typically be expected to support Sterling.

UK wages, with bonuses included, rose 3.4% in May which is well ahead of the 3.1% forecast by markets. Rising wages are important for the Pound as they tends to foreshadow changes in inflation: rising wages tends to lead to rising inflation, and this would typically elicit an interest rate rise at the Bank of England.

Rising interest rates tend to put a lid on inflation, and a side effect of higher interest rates are capital inflows that boost the currency.

"This morning’s labour data smashed expectations, with unemployment rates maintaining their historical lows whilst wage growth figures continued to outstrip inflation. However, the Pound cannot catch a break at the moment," says Hamish Muress, Senior Currency Strategist at OFX. “Under normal circumstances, positive labour data such as this would bolster the Pound, particularly given it is currently seen by many as undervalued. However, these are not normal circumstances that the Pound is trading under."

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