Currency markets were active again Friday, following the biggest upheaval for both sterling and the euro in more than two years, as investors continue to grapple with headline risk associated with Britain's looming exit from the European Union and slowing growth and tepid inflation in the Eurozone itself.
Prime Minister Theresa May defended both her Brexit agreement and her broader leadership credentials during a radio interview with London's LBC Friday during which she said her proposed arrangement was the best possible outcome from more than two years of negotiations with Brussels. However, several resignations from her cabinet of senior lawmakers, as well as report that her Conservative Party colleagues have gather enough support to force a formal leadership challenge, have keep sterling volatile in early London trading Friday.
"A UK leadership challenge and potential further resignations from ministers are now the main near-term risks to sterling," said ING Petr Krpata. "Importantly, even if the leadership challenge is unsuccessful, the key factor for sterling's prospects over the coming months will be the eventual parliament vote on the proposed Brexit deal."
Sterling was trading in a rage of between 1.2785 and 1.2820 during London dealing, with headlines suggesting both rising currency volatility and the uncertain prospects for May's tenure at Number 10 Downing Street.
At least 48 Tory party lawmakers would need to write letters to the so-called 1922 Committee in order to force a broader vote of their 315 members of Parliaments to either back May or propose a new prime ministerial candidate.
Replacing May would not only throw the entire government into chaos, it could also upend the very deal May negotiated with EU leaders in Brussels only hours earlier. The top EU negotiator, Michel Barnier, as well as European Council President Donald Tusk, said earlier Thursday morning that barring "something extraordinary," European lawmakers would vote on the proposed exit agreement on Nov. 25.
The euro was also weaker against the U.S. dollar following dovish comments on growth and interest rates for the single currency area from European Central Bank President Mario Draghi, who spoke to a banking conference in Frankfurt earlier in the session.
"Uncertainties surrounding the medium-term outlook have increased," Draghi said. "If firms start to become more uncertain about the growth and inflation outlook, the squeeze on margins could prove more persistent."
"This would affect the speed with which underlying inflation picks up and therefore the inflation path that we expect to see in the quarters ahead," he added.
The euro was marked at 1.1331 against the dollar following Draghi's speech, around 0.2% lower on the session, even as the outgoing ECB President said he saw "no reason" for the bloc's current run of 22 quarters of GDP growth.
However, Germany, the world's third largest exporter and the biggest economy in Europe, said GDP shrank by 0.2% in the three months ending in September, the first contraction since 2015, which officials said was "mainly due to foreign trade developments".
Germany's influential business lobby, the BDI, cut its 2018 export growth forecast by 50 basis points to 3% following the GDP data, and trimmed its outlook for industrial production from Europe's biggest economy to around 2.5%.