Pound Plunges as DUP Threatens Hopes of Brexit Deal

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  • RBA Deputy Governor Reassesses Definition of Full Employment – Odds point towards more cautious policy outlook
  • Pound Slides After DUP Threatens to Derail Brexit Deal – Party supports proposal to outlaw Northern Ireland backstop
  • Italian Government Asserts That EU Exit is Not on the Cards – Euro fails to take encouragement as dispute over budget proposals continues
  • Canadian Dollar Pushes Higher as Wholesale Trade Sales Better Forecast – Anticipation mounts for BOC interest rate decision

RBA Comments Limit Australian Dollar Appeal

Comments from Reserve Bank of Australia (RBA) deputy governor Guy Debelle encouraged investors to pile out of the Australian Dollar yesterday. As Debelle noted that he has ‘an open mind’ regarding the level defined as full employment AUD exchange rates came under pressure. With the unemployment rate likely needing to fall further before this feeds through into higher inflation the odds of the RBA raising interest rates eased. Even with market risk appetite generally picking up the mood towards the ‘Aussie’ remained bearish.

If other RBA policymakers echo this sentiment the Australian Dollar could shed further ground today.

DUP Rebellion Over Brexit Drags Pound Down

Confidence in the Pound nosedived in response to reports that the DUP will support a proposal to render the EU’s Northern Ireland backstop illegal. This move put a fresh wrench in progress towards a Brexit deal, encouraging market jitters as Theresa May struggled to shore up support among MPs. With a number of Conservatives still unconvinced by May’s plans worries remain over the prime minister’s ability to push through any potential deal.

With forecasts pointing towards a fresh decline in the latest CBI business optimism index the Pound looks set to remain under pressure over the course of the day.

Italian Budget Worries Limit Euro Demand

Although the Italian government ruled out the prospect of the country leaving the EU this did little to improve the appeal of the Euro overnight. As officials maintained their support for the 2.4% budget deficit target, which breaks EU budget rules, investors remain wary of the prospect of further conflict. The single currency was also dented by a report from the Bundesbank which warned that the German economy may have stalled in the third quarter.

Any easing in September’s German producer price index is likely to add to EUR exchange rate softness this afternoon.

USD Exchange Rates Shrug Off Easing Activity Index

A disappointing Chicago Fed national activity index was not enough to drive USD exchange rates lower at the start of the week. Even though the index weakened further than forecast the mood towards the US Dollar picked up overnight, shaking off this latest sign of softening economic momentum. Increased market jitters and geopolitical concerns encouraged investors to favour the safe-haven USD over its more sensitive rivals once again.

However, a similarly weak showing from the Richmond Fed manufacturing index could see the US Dollar struggle to hold onto its gains.

Better-Than-Expected Trade Sales Boost Canadian Dollar

After August’s Canadian wholesale trade sales data showed a smaller contraction on the month than forecast this helped to shore up CAD exchange rates. Although this still indicates that the domestic economy is coming under pressure the negative impact on the Canadian Dollar proved limited. A fresh decline in oil prices also failed to drag down the commodity-correlated CAD overnight, even as worries over global supplies mounted.

As anticipation mounts for this week’s Bank of Canada’s (BOC) policy decision, though, the Canadian Dollar is likely to come under increasing pressure.

New Zealand Dollar Struggles to Find Fresh Support

While market risk appetite helped to boost the New Zealand Dollar yesterday these gains proved short-lived. NZD exchange rates returned to a downtrend during the European session as investors took a more cautious approach to risk-sensitive assets as wider geopolitical tensions persisted. In the absence of any domestic data there was nothing to prevent the ‘Kiwi’ reversing some of its recent gains.

Demand for the New Zealand Dollar is likely to remain muted in the days ahead unless risk sentiment sees a resurgence.

Data Released

October 23rd 17:00 EUR German Producer Price Index (YoY) (SEP) 3.0%
October 23rd 21:00 GBP CBI Business Optimism (OCT) -4
October 24th 01:00 USD Richmond Fed Manufacturing Index (OCT) 24

Post by TorFX

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