Pound surges again as Catalonia uncertainty drags euro lower

The pound rallied for a second successive trading session on Monday (16 October) as uncertainty over Catalonia's political turmoil weighed on the euro and British Prime Minister Theresa May headed to Brussels for Brexit talks with her European counterparts.

At 3:42pm BST, the pound was up 0.17% versus the euro, exchanging intraday at €1.1258 as political uncertainty continues to dominate the headlines in Spain.

In an unclear letter to the Spanish government, Catalonian President Carles Puigdemont reiterated that the region is still planning to declare independence but that the declaration of independence has been suspended for now to allow discussions between the Catalans and the Spanish government.

Spain's Prime Minister, Mariano Rajoy, has made it clear that he is not open to talks because in the eyes of the Spanish law the 1 October referendum was illegal.

Consequently, the Spanish government has the right to trigger Article 155 and sack the Catalan regional government if they pursue independence. Fawad Razaqzada, technical analyst at Forex.com, said the uncertainty surrounding Catalonia may hold back the euro, although it will probably have more of an impact on European equity markets.

"As far as the common currency is concerned, it too could fall further in the unlikely event Catalonia is allowed to go independent, as this outcome is probably not priced in the markets."

All eyes are now on European Central Bank President Mario Draghi who will be speaking on Wednesday (18 October).

Meanwhile, Prime Minister Theresa May is heading for talks in Belgium with her European counterparts, after a European Union document - leaked to the media on Friday (13 October) -suggested the bloc was preparing to begin trade talks with the UK, despite public claims that there was a deadlock between London and Brussels.

Prior to her departure, a spokesperson said the PM was seeking a "constructive" dialogue with her counterparts, following her speech in Florence, as the pound extended gains against the dollar rising as high as $1.3311 in Asian trading, before falling to $1.3288, representing a nominal intraday dip of 0.03%.

The US currency has its own short-term woes to contend with, said Hussein Sayed, chief market strategist at FXTM. "Given that a December rate hike is almost entirely priced in, the dollar will be driven by longer-term expectations. The three rate hikes plotted on the Fed's dot plot for 2018, is nowhere near to markets' expectations of only one, and the main risk facing the greenback is who will lead the Fed after Chairwoman Janet Yellen departs.

"It will require robust economic data for dollar bulls to regain control, particularly in wages and inflation expectations. If these two metrics remain weak in the final quarter of the year, I think the dollar will continue to be dragged lower."

The British currency also registered intraday gains against other major crosses including gains of 0.49% and 0.10% against the Canadian dollar and Swiss franc, exchanging at $1.6654 and CHF1.297 respectively.