Sterling fell more than 0.5% early Monday, after the Sunday Times reported yesterday that 40 Conservative Party MPs agreed to sign a letter of no confidence in the Prime Minister, Theresa May. While this remains short of the 48 votes needed to force a new leadership, it still creates much frustration amongst investors seeking clarity on Brexit negotiations. With May’s position being potentially at risk and no significant progress after six rounds of talks with EU, sterling may come under increased pressure in the next couple of days, with the 1.3024 support level at risk of being breached. A leaked letter from Boris Johnson and Michael Gove pushing for Hard Brexit, add to the uncertainty as House of Commons meet on Tuesday.
It is also a busy week on the UK’s economic data front, with Consumer Price Index, Producer Price Index, labor data and retails sales due for release. However, politics is likely to remain the dominant factor moving the pound this week.
For investors finding the low volatility environment boring, have a look at bitcoin. The cryptocurrency lost more than quarter of its value after reaching a high of $7,888 on November 8. The cancellation of a plan to increase the bitcoin’s block size “Segwit2x” on Wednesday, is what’s to be blamed for the price crash, but given that prices rallied $400 on Monday, it seems the news has been digested. We have seen similar steep falls in bitcoin throughout the year; specifically in June and September, but every time a considerable decline occurs, new investors jump in to experience the new asset class. The increasing investor interest in the cryptocurrency market has pushed CME Group to announce the launch of a bitcoin derivative soon, indicating that more fund managers and professional investors will become involved. Although bitcoin might not be a suitable asset for conservative investors due to its volatility, I still see a great potential ahead.
Given that the earnings season has come to an end, equity investors will shift their attention to the U.S. tax reform plans. There is a considerable difference between the Senate and the House on how to proceed, and if no clear path evolves, I expect a further pullback in equities. The Senate’s proposed delay of the tax cut until 2019 is definitely not what President Trump is looking for, so it remains to be seen whether he can push Republicans to unify when he returns from his Asia tour.