Sterling lower as EU rejects May Brexit proposal

Investors in buoyant mood despite trade tariffs

Investors continue to brush off the ongoing trade dispute between the US and China, along with negative Brexit developments in Salzburg, with stocks in Europe trading higher to end the week.

Another winning day would cap a very good week for stock markets, with the Dow and S&P 500 both trading in record territory – the first time for the former since January – and those in Europe and Asia very much taking new US and Chinese tariffs in their stride. This may be a case of the tariffs already being priced in or being a little softer than was expected, but the important thing is it’s far from the end and investors may not be so buoyant if Donald Trump responds quickly and aggressively as he’s suggested he will.

Sterling slips as May is humiliated in Salzburg

The pound is paring its gains on Friday after the EU rejected Theresa May’s Chequers proposal, casting doubt on a compromise being found despite the UK being only months from leaving the block. Clearly traders don’t view this as too significant a setback or I would expect the drop off in the currency to be much larger and the rejection hardly comes as a surprise given that officials have publicly criticised the proposal in the past.

GBPUSD Daily Chart

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That said, reports do suggest that EU officials have taken a harder line against May following her insistence that it’s Chequers or no deal. Clearly they believe this is a bluff and haven’t taken to kindly to such a stance so late in the day. May now faces a tough challenge in returning to the UK ahead of the Conservative party conference no closer to a deal than she was before, leaving her with a massive target on her back as certain colleagues look to position themselves as a better alternative.

Euro edges lower on weaker PMIs

The euro is also paring earlier gains after PMIs for September painted a slightly gloomier picture, particularly for the manufacturing sector where trade conflicts, Brexit and falling global demand contributed to a decline in optimism. Manufacturers are clearly a little nervous about the number of risks for the sector and the volatility and difficulties in emerging markets right now will not be giving them much reason for optimism.

EURUSD Daily Chart

The euro area has been experiencing something of a slowdown for much of the year but this hasn’t deterred the ECB which still plans to end its bond buying program in December and consider a rate hike in the second half of next year. The latter plans may be shelved though if the economic situation doesn’t improve, something policy makers hope will naturally follow an easing of trade tensions and resolution on Brexit. Right now though this feels a long way away.

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This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam

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