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October 14, 2019

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Pound Sterling will Struggle to Go Much Lower vs. Euro: Nomura

The British Pound is said to already be trading at crisis levels, and as a result it will struggle to fall much lower says an analyst at leading global investment bank.

GBP is already “trading at crisis levels, and will struggle to go much lower,” says Jordan Rochester, foreign exchange strategist with Nomura in London.

That the Pound is already low by historical standards, it would suggest it will take successive bouts of bad news to really push new lows.

We wonder where such news might come from.

The Pound has recovered ground against the Euro over the course of the past 24 hours with news that Boris Johnson would replace Theresa May as Prime Minister on Wednesday.

The Pound-to-Euro exchange rate has recovered to 1.1160, having been as low as 1.1047 just last week.

“The Pound was volatile yesterday following Boris Johnson’s victory speech, as well as remarks from the BoE’s Haldane and Saunders who indicated they are not likely to vote for a rate rise in the near term. The Euro is under pressure ahead of tomorrow’s ECB policy announcement. The ECB is expected to prepare the ground for lower interest rates in September, although there is an outside chance of a reduction as early as tomorrow,” says Hann-Ju Ho, an economist with Lloyds Bank.

We would like to say the Pound is rallying exclusively on news Johnson is taking over, but we expect the picture is a great deal more nuanced: markets have known for weeks Johnson was incoming, and we believe they are now awaiting the next decisive moves on Brexit policy for guidance.

Furthermore, markets will be watching to see whether a General Election is likely in the UK before pulling the trigger on further Sterling declines.

Nomura’s Rochester also makes the point that the change at the top of the UK’s leadership extends well beyond the Prime Minister’s office:

“Over the next few weeks and months, the leadership transition will not only include a new Prime Minister, but a complete changing of the guard. In addition to a new PM, the UK can also look forward to seeing replacements for Chancellor, Cabinet, Bank of England Governor, budget and Brexit plan.

Despite the expected leadership changes, Rochester notes implied volatility levels in Sterling are still below levels seen back in March when markets were showing notable nerves over the prospect of potential big moves around the original Brexit date, and therefore “a lot of the negative news has been priced into spot,” says Rochester.

In short, the Pound is at levels that suggests it has eaten a decent share of bad news.

“GBP already trades at crisis levels and typically struggles to move much lower,” says Rochester. ‘While we acknowledge that a no-deal Brexit is a risk and would very likely record new lows in GBP, we do not expect the market to assign a higher hard Brexit premium than previously or until parliament returns after the summer break in September.”

Pound struggles to get much lower than this

Above: GBP/EUR since 2009: Sterling is at already-low levels, and it might struggle to fall lower

We believe the conditions for a recovery in Sterling over coming weeks, that coincides with Parliament’s summer break, is a distinct likelihood.

After all, this is a political currency, and with no politicians to bother it the prospect of a recovery grows.

Euro Hit by Dire Manufacturing Data

The Euro was in retreat from a steady Dollar and stronger Pound Sterling Wednesday after IHS Markit surveys for July pointed to a renewed economic slowdown in the Eurozone in the third-quarter, prompting calls for the European Central Bank (ECB) to support the economy with interest rate cuts and more quantitative easing as soon as this Thursday. 

The IHS manufacturing PMI fell to a 79-month low of 46.4 in July, from 47.6 in June, when financial markets had looked for it to remain unchanged.

However it was German manufacturing PMI which proved an eye-opener: the German Manufacturing PMI read at 43.1, well below expectations for 45.1.

Anything below 50 suggests contraction, it is therefore little wonder that Euro exchange rates are in retreat on the numbers:

The Pound-to-Euro exchange rate extended its short-term uptrend on the numbers to record a near-month high at 1.1207.

The Euro-to-Dollar exchange rate fell to close in on a new two-month low at 1.1139.

Meanwhile, the Eurozone services sector PMI fell from 53.6 to 53.3, in line with the market consensus.

The composite PMI, which combines the two previous surveys, fell from 52.2 to 51.5 this month suggesting that while the economy is still expanding it is close to stalling. 

New order flows stagnated in the manufacturing sector this month and confidence hit its lowest level since late 2014, leading companies to become more cautious about hiring new employees, IHS Markit says.

Exports were the weakest link again and many companies were forced to begin clearing old work backlogs to sustain output. “The key point here really is that the slowdown in manufacturing is now so severe that it almost surely will hit the official labour market data soon, which could change the political story, re fiscal policy, too. The chart shows that GDP growth rebounded at the start of the year, but incoming data suggest that the party ended abruptly in Q2, and the PMI now suggests a further slowdown in Q3, though it has an opportunity to recover in coming months,” says Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics.

Written by Gary Howes

Source: Pound Sterling Live

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Pound Sterling Dented by Carney Warnings

The British Pound is under pressure in mid-week trade with foreign exchange markets digesting a speech by Bank of England Governor Mark Carney that prompted markets to rapidly raise expectations for an interest rate cut over coming months.

Carney told an audience in Bournemouth late on Tuesday that the “stance of monetary policy is tighter than intended” owing to a disconnect between market expectations of interest rates and the Bank of England’s guidance on where they believe interest rate expectations should actually lie.

Carney’s added that downside risks to the economy have increased recently owing to global trade tensions and markets interpreted the comments as reason to increase expectations for an interest rate cut in coming months.

Currencies tend to fall when their central bank communicates the prospect of future interest rate cuts.

Carney said the global trade tensions have caused a “sea change” in investors’ outlook for the world economy that “suggests a shock to U.S. and Chinese business confidence and investment analogous to what has happened in the UK”.

“The latest actions raise the possibility that trade tensions could be far more pervasive, persistent and damaging than previously expected. The rationales for action are broadening,” he said in the speech.

The key phrase here being “the rationales for action are broadening”: markets quickly ramped up expectations for an interest rate cut at the bank on this comment. Money markets now assign a 57% probability of a 0.25% interest rate cut by the Bank in December, up from 41% ahead of Carney’s speech.

This repricing in expectations sent Sterling lower.

The intervention by the Governor means what had already been a poor day for Sterling just got worse leaving the currency trading near multi-week lows against the Dollar and Euro at the mid-week period.

“Things have gone from bad to worse for the Pound. After being knocked by a poor construction PMI earlier in the day, sterling slumped to hit a new session low moments ago in reaction to a speech by Bank of England Governor Mark Carney,” says Fawad Razaqzada, a Market Analyst with Forex.com. “Carney said the BoE expects economic growth in the second half of the year to be considerably weaker and that it will re-assess Brexit and trade tension in August.”

The speech appears to be a clear move by the Bank of England Governor to massage market expectations towards expecting a more sombre assessment at their next major policy update in August with the view to potentially laying the path to another interest rate cut.

However, we are told by one analyst this particular sell-off in Sterling might not be warranted as some interpreted the Governor’s speech as being more balanced than the market have judged.

“Carney did hint 2-way risks to Bank policy rate (explicitly says need for rate hikes if smooth Brexit). Sure nobody can see smooth Brexit / easing global trade tensions right now but no need to chase UK rates even lower (50% odds of 2019 cut priced). GBP sell-off overreaction,” says Viraj Patel, an analyst with Arkera.

Carney said the Bank of England was working on the assumption that both candidates in the leadership race to replace Prime Minister Theresa May would achieve their stated aim of reaching a deal with the EU.

If that happened, the outlook for Britain’s economy could improve quickly, which is why the Bank has not changed its main message about the outlook for rates: that gradual interest rate rises would be needed in the future.

“In the UK, the combination of the relatively strong initial conditions – including a tight labour market and inflation at target – and the prospect of greater clarity emerging in the near term regarding the UK and EU’s future relationship argues for a focus on the medium-term inflation dynamics,” Carney said.

The British Pound had already been under pressure against the Euro, U.S. Dollar and other major currencies earlier on Tuesday, July 02 as foreign exchange markets continue to express caution over the prospects of a disruptive Brexit and heightened prospects for a General Election before 2019 is out.

Adding downward pressure was a rude surprise in the form of Construction PMI for June that showed the sector has entered its deepest slowdown in ten years: the reading of 43.1 is sharply down on the previous month’s reading of 48.6, and well below analyst expectations for a reading of 49.3 to be delivered.

The data only adds to market concerns that the UK economy is stalling at a critical period for the country’s politic future. The economy has long been a bright spot for the Pound, underpinning it amidst chronic political uncertainties. We wonder what might happen to the currency now that the economy is looking less reliable.

We continue to maintain a view that currency markets are primarily focussed on the Brexit strategies of the two candidates to replace Prime Minister Theresa May in late July, and we hear today that front-runner Boris Johnson will make an offer to the European Union over post-Brexit free trade, but if it rejects that gambit then Britain will leave the bloc without a deal on October 31.

“With Boris, what he’s actually said clearly is: ‘We’re not going to go back and renegotiate’,” Iain Duncan Smith, Johnson’s campaign chairman, told Sky News.

“What we’re going to do is we will put a different offer down and say to them: ‘Look – we want to get to free trade. Now we can either start talking about that now if you are serious and you want to have a process that means we don’t end up … with tariffs etcetera after the 31st – if that’s what you want, the EU, then we are prepared to talk,” Duncan Smith said.

“But if all you are interested in doing is saying: ‘All you can have is this deal’, then the answer is: we will be prepared to leave on the 31st,” says Duncan Smith.

The developments will only further embed growing expectations for a ‘no deal’ into the value of Sterling we believe.

“A hard Brexit or the prospect of a new election is likely to weaken the GBP further, while a controlled withdrawal or a second referendum is likely to reduce the risk premium on the GBP and strengthen it,” says Dr Richard Falkenhäll, Senior Currency Strategist with SEB.

Merkel Will Talk: Hunt
Jeremy Hunt, who is fighting Johnson for the top job, has meanwhile said German Chancellor Angela Merkel will be willing to look at proposals for a revised Brexit deal.

“When you talk to those people … they also say that if a new prime minister comes forward with new proposals that are sensible of course they will look at the package,” Hunt told Sky News. “I have had a conversation with Angela Merkel. (She said) of course we will look at any proposals made by the new UK prime minister, because she wants to solve this problem.”

Hunt’s view on a potential willingness by the EU to look at the proposals of the next Prime Minister does offer some hope that a deal, of sorts can be done.

Of course EU leaders and officials have lined up over recent weeks to say there is only one deal on the table, and that is the current Withdrawal Agreement, and that it cannot be reopened for fresh negotiations.

We do however wonder if apparent EU intransigence on the matter will be permanent when faced with a Prime Minister who decidedly commits to a ‘no deal’ Brexit.

Hunt, who has long been seen as the ‘softer’ of the two candidates on Brexit is meanwhile appearing to harden his stance, saying that unless the EU budge by the end of September he will commit fully to a ‘no deal’ Brexit.

Johnson has long been of the opinion that a ‘no deal’ should be pursued if no improved deal with the EU can be found and has this week sought to downplay the negative impact of a potential ‘no deal’ Brexit.

We remain of the view that foreign exchange markets will continue to place great emphasis on Johnson’s intentions concerning Brexit and the strategy he intends to pursue.

“His “do or die” pledge to leave the EU on the 31st October has heightened ‘No Deal’ Brexit fears. We continue to believe a General Election or second referendum will be required to break the deadlock if parliament votes to prevent a ‘No Deal’ Brexit. We believe there is scope for further Pound weakness heading into the autumn,” says Derek Halpenny, Head of FX Research at MUFG in London.

Johnson said on Monday the impact of leaving the European Union without a deal would be “very, very small”, and added that he had a very carefully costed programme of spending plans.

“There is as you know about 26 billion quids worth of headroom. The money is there,” Johnson told reporters when asked about his spending proposals.

“We also think there is room to make some sensible tax cuts as well and we will be doing that too.”

Analyst sees Further Declines for Sterling against the Euro Ahead
Foreign exchange analyst Trevor Charsley with AFEX – a currency brokerage based in London – says he believes the Pound will continue to “staircase” lower against the Euro for the foreseeable future.

“For now at least the market here can continue to “stair-case” directly lower first/next instead and despite initial buying interest at 1.1100 a window of opportunity thus remains open to examine the psychological 1.1000 in coming sessions, Charsley says in a weekly briefing note to clients.

The Pound-to-Euro exchange rate has been under pressure since early June, when it was quoted as high as 1.17, and is now looking to be stuck in a range below 1.12 with a negative bias being in place.

Pound Shifting Negative Against the Dollar
The Pound has been tracking sideways against the U.S. Dollar since late May: bordered to the top by the 1.2750 area and to the bottom by 1.25-1.2550.

It appears that we are witnessing another impulse lower in the range.

“A closing break below 1.2650 has put a negative bias back into the recent phase of consolidation again,” says Richard Perry, a market analyst with Hantec Markets. “Momentum indicators are drifting lower, with the RSI into the low 40s, Stochastics lower and MACD lines plateauing, but these are more of a negative bias rather than precipitous bearishness.”

“Losing 1.2650 effectively opens the recent low at 1.2505,” adds Perry.

Written by Gary Howes

Source: Pound Sterling Live

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Sterling edges up as UK opposition tries to block no-deal Brexit

The pound rose towards a three-week high on Wednesday after Britain’s main opposition party said it would try to introduce parliamentary legislation to prevent a no-deal Brexit.

Investors are concerned the next prime minister could put Britain on course for a no-deal divorce with the European Union and send the pound plummeting.

Frontrunner Boris Johnson, a eurosceptic, has said he would be willing to take the nation out at the end of October, even if it meant leaving without a deal.

But Labour on Wednesday will debate a motion to seize parliamentary time on June 25 to give lawmakers the chance to introduce legislation preventing a no-deal Brexit.

“With the risk of a new leader with a new mandate behind a (somewhat) more unified Conservative Party, the opposition must make hay with mayhem while they can. By forcing this issue today, candidates must clarify where they stand on Brexit,” said strategist Helen Thomas, of Blonde Money.

A majority of lawmakers oppose leaving without a deal and other leadership contenders have warned parliament will block any attempt to do so.

The pound was up 0.2% at $1.2740, close to a three-week high of $1.2763 hit on Friday. It was flat against the euro at 89 pence

Sterling, which has been confined recently to a range of $1.26-$1.28, found some relief on Tuesday after British wages in the three months to April rose faster than expected.

Traders have largely ignored economic data releases in Britain recently, believing the Bank of England is unlikely to change interest rates until Britain decides how, when and even if it will leave the European Union. The United Kingdom is scheduled to exit the bloc on Oct. 31.

Reporting by Tom Finn; Editing by Andrew Cawthorne

Source: UK Reuters

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Sterling to slide on no-deal Brexit – Reuters poll

Sterling would weaken considerably against both the dollar and euro if Britain left the European Union without a deal, according to strategists in a Reuters poll, with many saying the pound could reach parity with the common currency.

The pound had its biggest monthly loss against the euro in two years in May and also lost against the dollar, whacked by risk aversion amid the Brexit impasse.

It is still unclear how, when or even if Britain will leave the EU almost three years since Britons voted in a referendum to part ways. The two sides are currently due to divorce on Oct. 31, later than the original March 29 deadline.

If the country leaves without a deal, foreign exchange strategists polled by Reuters on May 30-June 5 were almost unanimous in saying the pound would tumble.

Currently hovering around $1.27, median forecasts said cable would trade between $1.15-$1.20 within a month following a no-deal Brexit. Two said it could go as low as parity to the dollar.

On Wednesday one euro was worth about 88.6 pence, but the median trading range was 91-96p in a no-deal scenario. Almost half of respondents said the euro could strengthen to one pound or beyond.

“The risk of a no-deal Brexit is rather limited in reality but it would be catastrophic if it actually happens,” said Everett Brown at IDEAglobal.

ORDERLY BREXIT?

Boris Johnson, a former London mayor who was the face of the official 2016 campaign to leave the EU, is favourite to replace Theresa May as British prime minister. May announced last month she would quit the top job over her failure to deliver Brexit.

Johnson, who served as foreign minister in May’s cabinet until his resignation last summer over her Brexit proposals, takes a more hardline stance on the issue and has said Britain must leave the EU on Oct. 31 “deal or no deal”.

Still, Reuters polls of economists taken since the June 2016 referendum have consistently said the two sides would part ways with a deal agreed and median forecasts in the wider poll of around 60 strategists predict that sterling will strengthen.

One pound will be worth $1.27 in a month, in six months it will get you $1.30 and in a year will be over 5% stronger at $1.34. But that is still well below the $1.50 where it was trading before the June 2016 referendum to leave the EU.

“We still see an orderly Brexit resolution in 1H20 as more likely, hence we remain bullish on sterling in the medium term,” Morgan Stanley strategists told clients in a note.

Those median forecasts are a touch weaker than those given a month ago. The downgrade for sterling comes despite growing expectations that the U.S. Federal Reserve will soon follow other central banks and start cutting interest rates.

In contrast, the Bank of England was still narrowly expected to raise borrowing costs early next year in a Reuters poll taken last month.

The European Central Bank’s interest rates are going nowhere anytime soon, another Reuters poll found, and its next move will be to tweak its forward guidance to more easing.

So it was a similar strengthening story against the euro. The one, six and 12-month forecasts were 88.0p, 86.3p and 86.0p respectively.

Polling by Sumanto Mondal and Manjul Paul; Editing by Ross Finley and Gareth Jones

Source: UK Reuters

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Brexit Going Nowhere: Pound Drops to Three Month Low

The Pound hit a three-month low on Wednesday as investor sentiment soured on the lack of Brexit progress. Against its peers, the British Pound has become the worst performing currency this week as markets lose hope that Theresa May will be able to get her Brexit deal across the line on her fourth attempt next month. 

Brexit Goes Nowhere, British Pound Exchange Rate Hits Three-Month Low

It’s been almost three years since the monumental vote took place, and there’s still no deal in place, despite a Brexit day extension. The risk of a hard Brexit has also increased, with most of Theresa May’s successors seen as hardline Brexiteers. Sterling has tumbled by around 1.2% in five days, a far cry from earlier in the year when it was one of the market’s most impressive performers.

Maximilian Kunkel, UBS Wealth Management Chief Investment Officer for Germany, said:

‘We don’t think it makes any sense at the moment to trade in U.K. government debt. We have become relatively cautious on the U.K. in any case, given no matter what Brexit you’re going to get, in the end the U.K. economy is likely going to suffer from it.’

Meanwhile, Eurozone growth data surprised today, coming in at 0.3% quarter-on-quarter in Q1 on a seasonally adjusted basis, rather than the 0.4% expected. On the year, Q1 jumped from 1.2% to 1.3%.

The rest of the week is relatively quiet for Eurozone and UK domestic data, meaning a lot of the Pound to Euro (GBP/EUR) exchange rate’s movements will be determined by developments elsewhere and political events. The Pound to Euro exchange rate has been trending in the region of 1.1488, hitting highs of 1.1535, and residing at lows of 1.1445. The Pound to US Dollar (GBP/USD) exchange rate has hit lows of 1.2826 in today’s European session, with highs of 1.2923.

BY CHARLIE MURRAY

Source: Currency News Centre

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Sterling headed for worst week in a month as Brexit drags on

The British pound was headed for its biggest weekly drop in a month on Friday, dragged down by growing concern about stagnant Brexit talks.

A broad dollar rebound this month — it has gained against all its major rivals — has also undercut the appeal of the pound before a Bank of England policy meeting next week where policymakers are expected to leave interest rates unchanged.

Sterling – stuck around $1.29 – has struggled this week as lawmakers returned from an Easter recess with little sign of progress in Prime Minister Theresa May’s efforts to convince lawmakers to back her Brexit deal.

Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

Britain’s departure date from the European Union has been pushed back until as late as the end of October. The protracted divorce is hurting the British economy and poor productivity is hindering growth, Goldman Sachs said.

Sterling edged 0.3 percent higher to $1.2932, its weakest since mid-February. Against the euro, the pound traded flat at 86.3 pence. On a weekly basis, it is set to decline 0.6 percent, its biggest drop in four weeks.

Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh

The dollar, which rose towards a two-year high on an index of major currencies, also weighed on the pound. So did the prospect of a fresh push for Scottish independence.

“Renewed debate about the choice of currency for an independent Scotland will rekindle uncertainty. Sterling risks $1.2800 in the current strong dollar environment,” said Chris Turner, head of foreign exchange strategy at ING.

Differences over Brexit have strained relations with the British government, and Scotland will start preparing for an independence referendum before May 2021, First Minister Nicola Sturgeon said on Wednesday.

Scots rejected independence in a 2014 referendum and support since then has stuck at around 45 percent, opinion polls say.

Sterling positions: tmsnrt.rs/2XJwUXX

Reporting by Tom Finn; Additional reporting by Saikat Chatterjee; editing by Larry King

Source: UK Reuters

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GBP Forecast: Will Sterling Stabilize with Brexit Risk in the Distance?

GBP FORECAST – TALKING POINTS:

  • All has been quite on the Brexit front over the last two weeks with British MPs on recess and the UK’s departure deadline getting pushed back until October 31, but recent lack of news could change with Parliament back in session
  • The latest retail sales data out of UK could bolster the British Pound, but uncertainty surrounding EU Parliamentary elections as well as cross-party talks between Theresa May and Jeremy Corbyn pose as potential headwinds
  • Download the free DailyFX Q2 GBP Forecast for comprehensive fundamental and technical insight over the second quarter covering various Pound Sterling currency crosses
  • Check out this Brexit Timeline for a chronological list of events surrounding the UK’s withdrawal from the EU and how negotiations have impacted the markets

Since Theresa May suffered a third defeat over her Brexit Withdrawal Agreement, the Prime Minister has been conducting cross-party talks with Labour party leader Jeremy Corbyn. As British Parliament struggles to overcome its ongoing impasse regarding the next path for Brexit, the European Council agreed to extend Article 50 for a second time in order to avoid a hard-Brexit where the UK departs the EU without a deal. With the Brexit deadline now pushed back until October 31 and British MPs on recess for the last two weeks due to the Easter Sunday holiday, GBP price action has stabilized alongside collapsing implied volatility.

While Parliament is due to resume its session this coming week, the House of Commons has little on the schedule. Although, there will be some Parliamentary business on Tuesday, but the motions are regulatory in nature and are not expected to directly impact ongoing Brexit negotiations. On Wednesday at 11:00 GMT, the Prime Minister will address the Main Chamber and take questions from British MPs which will hopefully provide an update on the latest Brexit developments.

That being said, the next Brexit steps and upcoming EU Parliamentary elections will likely prove pivotal for GBP prices over the short and medium term. Forefront risks highlight the ongoing cross-party talks between May and Corbyn as well as the possibility of Tories ousting the Prime Minister from her position.

FOREX ECONOMIC CALENDAR – GBP

GBP Forex Economic Calendar British Pound Sterling Price Chart

Honing in on the Pound Sterling economic calendar we can see that next week will be relatively quiet on the data front. Financial reports covering the public sector net borrowing released on Wednesday at 8:30 GMT and loans for house purchases expected Friday at 8:30 GMT will likely take the spotlight for upcoming UK economic data.

Also, with GBP bulls overlooking tepid inflation data, robust employment and retail sales numbers last week data could provide the British Pound with a positive tailwind. It is probable and should come as no surprise, however, that the progression of Brexit talks and related headlines will overshadow macroeconomic data and serve as the primary driver of GBP performance.

by Rich Dvorak

Source: Daily FX

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The British Pound is a Buy says Morgan Stanley

The Pound remains the best performing currency in the G10 universe for 2019 but the British currency has much further to rise, according to analysts at Morgan Stanley, who’ve recently told clients to buy the British currency.

Morgan Stanley forecasts double digit upside from Thursday’s level for the Pound-to-Dollar rate before the year is out and around a 3% increase for the Pound-to-Euro rate, the latter of which has already risen 5.4% thus far in 2019.

Analysts at the bank also advocated that clients buy the Pound-to-Dollar rate earlier in March, as they themselves are targeting a move up to 1.3650, although their year-end forecast for that exchange rate is much higher.

Expected changes in relative interest rates are key to much of the projected increase but the anticipated shift in base rates and bond yields could not happen without a resolution of the Brexit saga that’s ongoing in the UK parliament.

“This week’s Brexit news affirms our view that the probability of a softer Brexit is continuing to rise, particularly a Brexit that includes tighter economic linkages to the EU. Meanwhile the risks of a hawkish BoE remain underpriced – wage growth continues to rise in the UK while capacity pressures bite, suggesting potential inflation pressures,” says Hans Redeker, head of FX strategy.

Significant numbers of MPs have indicated they will now back Prime Minister Theresa May’s EU Withdrawal Agreement for fear of losing sight of the exit door entirely, including former foreign secretary Boris Johnson and at least 25 others.

Those pledges of support came after PM May offered to resign once her signature bill is through the House of Commons. However, a large number of MPs still oppose it and the Democratic Unionist Party (DUP) of Northern Ireland is so-far unmoved in its opposition to the treaty.

The withdrawal agreement will set the stage for negotiations on the future relationship so a change of Prime Minister would not address its deficiencies If it is not passed this week the UK will receive from the EU an Article 50 extension that runs only until April 12.

At that point MPs will choose between a so-called no deal Brexit and a much longer extension that would require participation in EU elections while politicians establish a way forward. PM May has said she will not allow a “no deal” exit unless parliament consents to it, but MPs voted on Wednesday with a majority  of 240 to reject that idea.

“The announcement of a proposed Brexit extension raises the risk of a public vote to ultimately solve Brexit, which may add some short-term risk premium and uncertainty into the currency. However, the long-term probability of a softer Brexit outcome is, as a result, rising, making GBP longs still attractive in our view,” Redeker says.

This will give the Bank of England (BoE) an opportunity to lift its interest rate again, by eliminating the risk of a “no deal Brexit”, which has long been seen as the difference between whether the BoE hikes or cuts its rate next.

The trade tariffs and non-tariff barriers on bilateral trade that would come with a “no deal Brexit” could potentially undermine the outlook for inflation by reducing demand in the economy. As a result, the BoE has been reluctant to make any changes to interest rates before it knows exactly how the Brexit saga will end.

The Bank of England has raised its interest rate by 25 basis points on two occasions since the referendum in 2016, taking the Bank Rate up to 0.75%, it highest level since before the global financial crisis.

But the central bank has said repeatedly in recent months that elevated inflation and a robust outlook for consumer price pressures mean it’ll need to keep raising rates in the coming quarters.

“GBP is most highly correlated to local rates and rate differentials, suggesting that a hawkish shift [at the Bank of England] should propel GBP higher. A key risk to the trade is that UK economic data softens, reducing the probability that the BoE raises rates,” Redeker says, in a note to clients.

Interest rate changes influence exchange rates through their impact on the attractiveness of related investments, particularly those in the bond market. They do that by reducing, or widening already-negative, interest rate differentials.

International capital tends to flow wherever relative interest returns are most favourable so if the gap between two interest rates moves in favour of one currency that is on one side of an exchange rate, that currency will normally be rewarded with a bid from the market.

The U.S. Federal Funds rate of 2.5% is substantially higher than the BoE’s 0.75% but markets are already speculating the Federal Reserve could cut its interest rate next year so if the BoE were to lift Bank Rate the Pound-to-Dollar rate differential would move in favour of Sterling.

It is a gradual increase in market bets on BoE rate hikes that Redeker says will drive the Pound-to-Dollar rate up to Morgan Stanley’s forecast of 1.52 by year-end, from 1.32 on Thursday, which implies an increase of 15% to come on top of the 3.5% gain already under the exchange rate’s belt.

The Pound-to-Euro rate is forecast to rise by almost 3% to just below the 1.22 level, from 1.1720 Thursday. The lesser increase in that exchange rate owes itself to the fact the Euro-to-Dollar rate is also projected to rise substantially, to 1.25, from 1.1250 Thursday.

By James Skinner

Source: Pound Sterling Live

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Sterling rises after UK lawmakers vote to take control of Brexit process for a day

Sterling rose at the start of the Asian trading session after British lawmakers voted to wrest control of the Brexit process from Prime Minister Theresa May’s government for a day.

The pound, unchanged before the result of the vote, rose 0.2 percent to $1.3224, the session high.

The British currency was also stronger versus the euro, up 0.2 percent at 85.59 pence.

Soruce: Reuters

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The pound is surging after UK and EU make a fresh Brexit breakthrough

  • Pound jumps after reports UK and EU negotiators made another breakthrough on the path to Brexit.
  • The pound has gained more than 1.1% against the dollar on Thursday morning.
  • It had dropped sharply in the past week after Cabinet resignations over Prime Minister Theresa May’s Withdrawal Agreement.

Prior to Tusk’s comments, an EU official said on Thursday morning that a 20-page declaration had been finalized ahead of an EU summit on Sunday where Prime Minister Theresa May hopes to have the Brexit divorce deal signed off.

The news, which marks another major step forward in the Brexit process, sent the pound flying higher, gaining as much as 1.1% against the dollar, and passing back above the $1.29 mark, which it dropped below a week ago after a series of resignations from the British Cabinet.

Sterling does, however, remain below the level it was trading at when Brexit Secretary Dominic Raab resigned in protest at the deal.

“The reaction itself is more telling than its magnitude. Optimism still remains in the market and sterling’s ability to explode at the blink of an eye is captivating,” Simon Harvey, a market analyst at Monex said in an email.

By 10.40 a.m. GMT (5.40 a.m. ET), it was trading at $1.2910, a gain of 1.15%, as the chart below shows:

Screen Shot 2018 11 22 at 10.41.03Markets Insider

The pound has taken off after reports that UK and EU negotiators have made another breakthrough on the path to Brexit.European Council President Donald Tusk said on Thursday morning that a political declaration on the UK and EU’s future relationship “agreed at negotiators’ level and agreed in principle at political level.”

Source: Business Insider UK

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