No-Deal Brexit Fears May Renew Pound Drop, Trigger Risk Aversion

TALKING POINTS – POUND, BREXIT, YEN, AUSSIE DOLLAR, TRADE WAR, EURO, DRAGHI

• Yen up, Aussie Dollar down as no-deal Brexit fears sour sentiment
• British Pound selloff may resume as UK PM Theresa May teeters
• Euro vulnerable on dovish comments from ECB President Draghi

Signs of deteriorating risk appetite began to emerge in the G10 FX space toward the end of an otherwise quiet Asia Pacific trading session. The sentiment-geared Australian and New Zealand Dollars declined in tandem while the anti-risk Japanese Yen traded broadly higher.

A clear catalyst for the move is not readily apparent. One plausible explanation may be that it reflects reversion to the risk-off mood prevailing against a backdrop of Brexit-related turmoil before conflicting cues about prospects for de-escalation in the US trade war with China muddied the waters in late Wall Street trade.

Reports suggesting that Beijing officials furnished their Washington counterparts a list of potential concessions triggered a burst of optimism. Commerce Secretary Wilbur Ross pushed back against the hopeful mood however, saying a planned tariff hike in January will proceed.

“NO-DEAL” BREXIT FEARS MAY SINK POUND, TRIGGER RISK AVERSION

Investors may be forgiven for turning defensive as the European session approaches. The fate of UKPrime Minister Theresa May hangs in the balance as eurosceptic Tories plot her ousting, displeased with what they see as too incomplete of a Brexit envisioned in the plan she struck with Brussels.

If Mrs May is removed and her EU/UK divorce deal scuppered, there is almost certainly insufficient time to secure an alternative before the deadline in March. That would set the stage for a “no-deal Brexit”, an outcome that will probably prove highly disruptive for economic growth.

If such a scenario begins to look more likely as the Prime Minister teeters, the British Pound is likely to resume yesterday’s decline while another round of broad-based liquidation sweeps across the risky asset spectrum. Sterling managed a tepid retracement higher in APAC trade after earlier bloodletting.

EURO MAY SUFFER ON DOVISH COMMENTS FROM ECB’S DRAGHI

Elsewhere, dependably cautious ECB President Mario Draghi is scheduled to speak. Any remarks suggesting regional political uncertainty – be it a chaotic Brexit or Italian budget woes – that might slow the arrival of the first post-QE rate hike are likely to weigh on the Euro.

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ASIA PACIFIC TRADING SESSION

EUROPEAN TRADING SESSION

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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