Pound Higher Ahead of Brexit Court Ruling

GBP boosted by weak dollar and softer Brexit outcome

The British pound has been one of the best performing currencies in a week that saw the U.S. transfer of power to Donald Trump. The dollar has lost momentum ever since Trump gave little details about his strategic decisions in a press conference on January 11. The markets have been looking for further insights into how he intends to implement the changes needed to boost growth. The greenback was flying high after the election on the back of comments for infrastructure spending and fiscal stimulus, but has been hurt by anti-trade rhetoric in the press conference and again on his inaugural speech.

The Trans Pacific Pact (TPP) is the first casualty of an “America first” stance after President Trump signed the executive order removing the United States from the 12 country trade deal. The fate of NAFTA uncertain with members of the new administration to meet with Mexican and Canadian officials.

The pound is higher as the market expects greater parliamentary involvement in the Brexit process to be the result of the United Kingdom’s Supreme Court ruling. The court will give its ruling at 4:30 am EST (9:40 am GMT) on Tuesday, January 24. A win by the government could mean a hard Brexit as it has set a timeline starting at the end of March. A defeat will open the end of U.K. membership in the European Union process to input from anti-Brexit members of parliament with a possible result of a softer or less harsh divorce.

The GBP/USD gained 1.035 percent in the last 24 hours. Cable is trading at 1.2503 and has been one of the biggest winners after the inauguration of President Trump. The dollar rally has stumbled after the initial enthusiasm about American infrastructure spending and fiscal stimulus has waned as those topics have been pushed to the background in favor of anti-trade policies and rhetoric.

The rise of the currency has taken its toll on the stock market. The focus remains on the end of the membership of the United Kingdom in the European Union. The ruling by the Supreme court could define where the pound goes next. The outcome surprised markets that were misinformed by polls and painted a bleak outlook for Britain. The pound has been able to recoup some of the losses, but the reality remains that the process hasn’t started. Article 50 has not been invoked. This is at the heart of the ruling on Tuesday. If the court decides the government cannot invoke Article 50 without input from parliament a hard Brexit as evidence by Prime Minister Theresa May would be reality sending GBP lower.

The market expects a defeat for the government and a slower Brexit process with more room for negotiation that could result in a better deal than just exiting the Union. The words of Theresa May in her Brexit speech have also helped stabilize the currency as she has mentioned both houses will have to prove the final decision whatever the outcome of the ruling is.

Market events to watch this week:

Tuesday, January 24
4:30am GBP EU Membership Court Ruling
7:30pm AUD CPI q/q
Wednesday, January 25
4:00am EUR German Ifo Business Climate
10:30am USD Crude Oil Inventories
4:45pm NZD CPI q/q
Thursday, January 26
4:30am GBP Prelim GDP q/q
8:30am USD Unemployment Claims
Friday, January 27
8:30am USD Advance GDP q/q
8:30am USD Core Durable Goods Orders m/m

*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza