The Pound ended the week firmly on the decline yesterday, with the Euro recovering from a multi-day sell-off and Sterling kept in limbo as markets awaited news from the House of Lords.
The bill to authorise Theresa May to invoke the EU exit clause as set out in Article 50 of the Lisbon Treaty was debated at the beginning of last week. The next stage of the process is the committee stage, but this traditionally does not take place until two weeks after the second reading.
While investors are reasonably confident that the House of Lords will have more success in attempting to amend the legislation than the House of Commons, the prospect of several days of silence weakened appetite for the Pound.
The Conservative government does not hold a majority in the House of Lords, which means that amendments to the bill rejected in the House of Commons could be passed in the Upper House.
If amended, the bill would then have to return to the Houses of Parliament for approval. Should MPs reject the altered legislation, a game of Parliamentary ‘ping-pong’ could ensue as the legislation bounces back-and-forth between the two houses.
Although this lack of certainty weakened the Pound towards the end of the week’s trading, next week could see GBP EUR returning to data correlation.
Of particular interest will be Friday’s Markit PMIs. The services index for February is expected to rise marginally, which would help dampen fears that the economy will experience a slowdown in the first quarter.
Poor data is likely to see skittish investors deserting the Pound in greater numbers, as the outlook for the UK economy will be rather gloomy overall, what with Brexit and a potential economic slowdown on the horizon.
However, Sterling could find its decline against the Euro slowed if Eurozone data complicates the outlook for the common currency.
German inflation data is expected to show overall price growth rose above the European Central Bank’s (ECB) target level.
While the argument that interest rates should be hiked in response is likely to initially undermine GBP EUR exchange rate strength, the ECB would surely remain dovish in response to the data.
Sooner or later a policymaker is bound to comment that the data does not necessarily mean price growth across the currency bloc is strengthening to the point of overheating.
This would sour Euro appeal and therefore the Pound, despite the pessimistic outlook, may not weaken too much next week and could even see bullish gains if key data prints positively or beats forecasts.
As the end of trading approached yesterday, the Pound Euro exchange rate was trending around 1.18.