The pound suffered its worst day against the dollar this year on Friday, following renewed concerns over the prospect of a no-deal Brexit. The Chequers plan put forward by the government was deemed unworkable by EU leaders at a summit in Salzburg, Austria, which effectively means that Theresa May now has to either come up with an entirely new plan, or make large changes to the existing plan.
However, as it stands, this looks easier said than done: the two options offered by the EU are thought to be unacceptable to the government. Investors were clearly worried about the new impasse, as sterling tumbled, posting its biggest one day drop against the dollar and second-biggest one day drop against the euro. May appears determined to thrash out an agreement with the EU, but the real question is how?
Last week we also saw inflation surprisingly increase to 2.7% which helped the pound in the middle of the week, as the markets believe it increases the chances of an interest rate rise in the near future. Strong retail sales in August have also bolstered this belief and it now possible that the Bank of England will hike rates one more time before the year is out.
On Friday, public sector net borrowing figures showed that the UK’s budget deficit widened to £5.89 billion in August from £3.48 billion in the same month the previous year. This was much wider than the £2.85 billion gap the markets had been expecting, but Brexit-related news pushed the data release into the background. Today, we have the CBI industrial trends orders for September and on Wednesday we will see the CBI distributive trades for the same month. We will also see UK finance mortgage approvals for August, before the main release on Friday: the final reading of the GDP growth rate for the second quarter of 2018.