The British Pound to Euro exchange rates fell sharply as Monday's European session got underway, extending a record long stream of losses for a thirteenth successive week. At the time of writing, Sterling was seen trading at €1.10905, down 0.32% on the day thus far.
Losses for the GBP were largely attributed to - unsurprisingly - continued concerns that the new PM appears to be setting the UK on a path to no deal while single currency gains stemmed from a less-dovish-than-expected European Central Bank (ECB).
Pound Sterling Slumps as Government Turbo-Charge No-Deal Preparations
Continuing its slide after a very brief period of respite following the conclusion of the Tory leadership contest, the UK Pound remained under considerable pressure as the weekly session got underway with markets digesting the weekend's political news-flow which overall point to greater risks around no-deal Brexit.
"We did not see fundamental justification for the Pound’s initial relief rally to be sustained while the risk of a “No Deal” Brexit continues to rise under PM Johnson’s new government," wrote MUFG currency strategist, Lee Hardman, adding "The promotion of hard Brexiteers to key cabinet positions is consistent with a government that will press hard to deliver Brexit at the end of October with or without a deal."
Most notable were comments from senior government officials in regards to Brexit talks with the EU. According to a number of cabinet ministers, the government is now working under the assumption that EU leaders will continue to refuse to renegotiate the controversial Withdrawal Agreement - a stance which shouldn't really come as a surprise since its been the line of the EU since the deal was agreed in late 2018 - therefore spurring the government to focus on no-deal prep.
"While we are optimistic about the future, we are realistic about the need to plan for every eventuality. The EU’s leaders have, so far, said they will not change their approach — it’s the unreformed withdrawal agreement, take it or leave it," wrote Michael Gove, adding "We still hope they will change their minds, but we must operate on the assumption that they will not."
While UK lawmakers are likely to take steps to block a no-deal departure from the common currency bloc - potentially opening the door to softer Brexit scenarios - the protraction of political uncertainty either way is expected to be Sterling-negative.
"With the new government rhetoric on a hard Brexit firming (Michael Gove’s comments that “no deal is now a very real prospect”) and the rising likelihood of early elections, sterling should remain under pressure," wrote ING chief EMEA FX and IR strategist, Petr Krpata adding that Sterling exchange rates could "head towards EUR/GBP 0.95 / below USD/GBP 1.20 level over the coming months if early elections do indeed materialise and the Conservative party under Prime Minister Boris Johnson runs on a ticket of a divisive Brexit stance against the EU."
Further solidifying expectations that the government is willing to go through with its threat of no deal were comments by newly appointed foreign secretary, Dominic Raab, who on Monday suggested it would be easier to secure a post-Brexit trade deal with the EU than attempt to negotiate a deal under the current circumstances.
"I think it will be much easier, for example, to deal with the backstop issue in the context of a free trade agreement than it would under the current arrangements, which are so undemocratic," said Raab in an interview with the BBC.
While Brexit remains at the fore, the week ahead will see the latest Bank of England (<a href="/news/c/bank-of-england.html">BoE</a>) policy releases with investors increasingly expecting policymakers to abandon their call for higher UK interest rates and instead adopt a more neutral/dovish stance as Brexit-related uncertainty and a general global slowdown weigh heavily on the British economy and the outlook therefor.
"Keep calm & stay bearish," wrote Oversea-Chinese Banking Corporation (OCBC) analyst Emmanuel Ng, adding "With PM Johnson peddling the hard line on the Brexit negotiations, and the Bank of England also turning its back on rate hikes, there might be little in the way of an upside for the GBP for now."
Euro Supported by ECB but Key Data Could Cement Easing Expectations
Ahead of a slew of potentially high-impact data this week, the single currency remain buoyant versus the GBP following last week's less-dovish-than-expected European Central Bank (ECB) policy releases.
While the policy summary statement and subsequent Draghi-led press conference left investors with little doubt that easing lies ahead, the overall tone wasn't as dovish as markets had anticipated, leading to a stronger Euro post-ECB.
Ahead of this week's Fed and September staff projections, Draghi erred away from providing specifics on the shape of the expected upcoming stimulus package.
"Basically, the ECB wants to see the incoming data in the coming weeks and the September staff projections before it makes a decisions," wrote Rabobank strategist Bas de Geffen, adding "However, we still believe the September rate cut is all but a done deal. Additionally, the odds of asset purchases accompanying rate cuts have increased substantially."
With a slew of data on this week's agenda, including preliminary CPI prints and final PMIs for the bloc's big four alongside German labour market statistics and retail figures, investors will be looking for a continued softening in data to cement easing expectations which in turn could curtail upside for the EUR.
"The hard eurozone data releases this week should further cement the ECB's dovish guidance from last week and justify the case for a likely package of easing measures in September (20bp rate cut and a re-introduction of quantitative easing)," wrote ING's Krpata, adding "Second quarter eurozone GDP growth (Wednesday) has likely slipped and both headline and core CPI (Wednesday) should have remained weak," and that such eurozone data could keep the single currency subdued this week.