The pound had a bad day on Monday as the combination of domestic political uncertainty, the resumption of formal Brexit negotiations and poor incoming economic data finally took its toll. By early afternoon it was down below USD1.4000 and though it managed to find some support around last week’s low, the subsequent bounce was far from impressive. As the sell-off in US equities accelerated and the USD was bid, GBP/USD closed in New York at a near 2-week low and finished firmly at the bottom of our one-day performance table.
In economic data, the UK service sector PMI fell from 54.2 in December to just 53.0 in January; the slowest upturn in services output for 16 months. Growth was reportedly curtailed by the loss of existing clients and lingering concerns surrounding the UK’s exit from the EU. January data pointed to a slowdown in growth of services activity across the UK, which stemmed from relatively weak gains in new work. Job creation nonetheless picked up as companies retained positive expectations surrounding the outlook. Although the latest results revealed an easing of inflationary pressures, rates of increase in both input costs and output charges remained above their long-run trends.
In a meeting at Downing Street between UK Brexit Minister David Davis and Chief EU negotiator Michel Barnier, Mr Davis claimed with a completely straight face that, “the UK government has published a great deal about what it wants. It wants a comprehensive free trade agreement, and a customs agreement, allowing trade to be as frictionless as possible. It is perfectly clear what the UK wants”. For his part, Mr Barnier said, “Without the customs union, outside the single market, barriers to trade and goods and services are unavoidable… the time has come for the UK to make a choice”. This, of course, is the very opposite of what the Prime Minister wants. Any clear choice or hard decision will immediately inflame half her Cabinet and will heighten pressure for her to quit as Prime Minister. There is no ‘unity candidate’ waiting in the wings because there is no unity on the Government side in the House of Commons. At some point, if the UK political situation continues to deteriorate, a ‘Corbyn discount’ may even have to be priced into the pound.