(16 MAY 2019)DAILY MARKET BRIEF 1:GBP in torment as Brexit risk revives

After reaching its highest range in early May amid hopes of a swift arrangement between both leading parties Conservatives and Labor, it appears that the British pound loses sight. Nervousness over upcoming EU parliamentary elections is felt, as recent polls are favoring Nigel Farage’s newly formed Brexit party with a majority of 34% while both historical leading parties are ranked second (Labor party: 21%) and fourth (Tories: 11%), alongside with pro-EU Liberal Democrats (12%), thus rising risk of a potential disorderly Brexit looking forward. Yet the UK is certainly not an isolated case where we should see unconventional parties taking the lead (i.e. Italy, Austria, France, Germany, Denmark or Finland, not to mention others).

There is therefore good reasons to consider downside risk for GBP as a hard Brexit would have extreme consequences on the currency. Furthermore, the recent labor data releases are not particularly rejoicing. Despite an unemployment rate of 3.80% in March, lowest since 1974, wage growth of 3.20% (prior: 3.40%) shows signs of weakness while the monthly staff demand index from Recruitment and Employment Confederation and accountants points to 53.6 (prior: 55.5) in March, its lowest level since August 2012, suggesting that the robust labor market is losing pace.

We would therefore favor a GBP bearish bias. GBP/USD lost -2.55% since its high from 3 May 2019 (1.3173). The pair is approaching support at 1.2803 (14 February 2019 low).