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December 18, 2018

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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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Sterling falls to lowest against dollar since November

The pound fell to a six-month low against a rallying dollar on Tuesday, while it held its own against a euro dragged down by concerns about a deepening political crisis in Italy.

Sterling has slumped against the dollar since mid-April as expectations of a Bank of England interest rate rise recede and the economy shows signs of prolonged weakness.

Renewed concerns about whether Britain can secure the Brexit deal it wants have also impacted the currency.

Against the dollar, the pound slid as much as 0.7 percent to $1.3205, its weakest since mid-November. The British currency, previously one of the best performers in 2018, is now down more than 2 percent versus the dollar so far this year.

 “We can ascribe a lot of it (pound weakness) to the U.S. dollar but I think sterling has been on the back foot independently,” said Jane Foley, an FX strategist at Rabobank, citing relatively downbeat UK retail sales and inflation data published last week.

Investors are only pricing in a one-in-three chance of the Bank of England raising borrowing costs in August, the next time it updates its economic forecasts.

 “There is nothing in there to restore confidence in the BoE’s ability to raise rates,” Foley said.

David Madden, an analyst at CMC Markets, said the pound remained “in its downward trend” and pointed to $1.32 as a key target.

Versus the euro, sterling has performed much better, and at GMT 1515 on Tuesday traded up 0.3 percent at 87.12 pence per euro.

Worries about divisions within the British government about whether it wants to remain in a customs union with the European Union after it leaves the EU in March 2019 have undermined sentiment towards the pound ahead of an EU summit in June.
However, the euro’s rapid descent – caused by investors buying into dollars and concerns about political uncertainty in Italy – have underpinned the pound and it remains up versus the single currency in 2018.

Source: UK Reuters

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Sterling struggles to rise above $1.39 as Brexit nerves grow

Sterling climbed on Monday and held near the day’s highs as risk appetite prompted investors to buy the currency but concerns over progress in Brexit negotiations limited the gains.

“There is plenty of noise out there and while expectations of a UK rate hike is about 70 percent priced in by markets, the outcome of the talks later this month is key,” said Marc Ostwald, a global strategist at ADM Investor Services International in London said.

The pound rose 0.4 percent to $1.3905, broadly in line with gains registered by other currencies against the dollar, but it is still some way below a post-Brexit referendum high of $1.4346 in late January.

Strong U.S. job growth data on Friday was balanced by slower increases in wages, resulting in money market traders sticking to bets that the Federal Reserve would raise interest rates three times this year. This encouraged investors to add bets against the struggling dollar.

Sterling also edged 0.2 percent higher to 88.65 pence to the euro.

Latest positioning data also indicated an undercurrent of nervousness about the British currency, with net long sterling positions slashed to their lowest since early December.

Worries have grown that Britain and EU officials would fall short of securing a transition arrangement at a March 22-23 summit as differences have grown in recent days. Such an outcome would question market expectations of a 25 basis point rate increase by the Bank of England in May.

“We expect euro/sterling to be volatile ahead of the summit due to conflicting headlines we have seen in recent weeks and as such we remain cautious on the British currency’s outlook,” said Morten Helt, a currency strategist at Danske Bank.

Money markets are pricing in a 70 percent probability of another UK rate rise by May, compared with virtually nil in January.

Finance minister Philip Hammond looks set to announce Britain’s smallest budget deficit since 2002 this week but he is still likely to resist calls to loosen his grip on public spending for now.

Source: UK Reuters

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GBP USD and EUR USD close to multi-month highs

GBP: Thin runners

Although markets were thin yesterday with a lot of market participants opting for another day of festive rest, the pound was happy to run higher, predominantly against the USD. Cable hit a 3 month high yesterday and as of this morning sits about 0.5% away from its highest level since June 24th 2016; the day after the Brexit vote.

Yesterday’s UK manufacturing data showed that the sector continues to chug along at a decent rate buoyed by demand from export markets and domestic intermediate and investment sectors. UK goods are, courtesy of the weakened pound, on a Blue Cross sale at the moment but the news that providers to domestic consumers saw a slowing of demand will harden concerns over the outlook of the British shopper. Inflation within the sector remains at a high level too and we will have to keep a close eye on how much of this can be passed through to the end consumer and how much will have to come out of already stretched margins.
News from the construction sector is due this morning with the services sector reporting on Thursday. .

USD: Buttons and minutes

The dollar has recovered some of its 2018 losses overnight although remains weaker on the year still against the pound, euro, yen and most other major currencies.

Donald Trump is still playing a game of ‘my dad is bigger than your dad’ on Twitter vs Kim Jong Un. Following the North Korea leader’s announcement that the nuclear button “is always on my desk”, Trump tweeted “Will someone from his depleted and food starved regime please inform him that I too have a Nuclear Button, but it is a much bigger & more powerful one than his, and my Button works!”
Tonight’s Fed minutes release is from December’s meeting that saw the Federal Open Markets Committee hike interest rates for the 3rd time in 2017. This meeting and decision had two dissenters on that move although growth expectations had been revised higher thanks to the then expected passage of the Republican tax plan.
Although we are in the early days of 2018, there is very little change in the overall market psychology from the 2nd half of 2017. As a result the age old back and forth of inflation, wages, the impact of the US deficit on costs will be in focus for much longer.

EUR: Stronger sellers when it comes to pricing

News from the overall European manufacturing sector was enough to push EURUSD to within touching distance of its highest level for some near 3 years. Within the manufacturing numbers pricing pressures are tipping back into the hands of sellers as opposed to buyers which is a good thing for those looking for higher inflation and therefore higher interest rates from the European Central Bank in time.
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British Pound Vs Euro Has Strategists Divided As The Bank of England Looms

November’s interest rate decision is fast approaching and, with recent data having shown the UK economy at risk of a slowdown, strategists are increasingly divided over what to expect from the Bank of England.

Those hoping for a retreat from earlier warnings over UK interest rates may be left disappointed in the wake of the Bank of England’s November monetary policy announcement.

A solid majority expect the Bank of England to hike rates in November while less than half of strategists expect it to follow through with further policy action in the months after.

“There is an argument doing the rounds that the UK is raising rates so that they can cut them when the ‘inevitable’ Brexit-related collapse happens. Maybe,” says Ben Powell CFA, a multi-asset class content salesperson at Swiss bank UBS.

The bulk of those who do not subscribe to the Brexit collapse view have often cited growing concerns over FX-induced inflation as the motivator behind what is, according to them, likely to be limited policy action.

“At 4.5% UK unemployment is at lows not seen in 5 decades. UK asset prices are booming. In 2016 UK household wealth rose by ~GBP900bn to beyond GBP10Tr for the first time. That ~GBP900bn growth is around 50% of GDP,” says Powell.

But UK economic fundamentals have remained on a sound footing since the Brexit vote in June 2016, despite the prevailing narrative in much of the media and most parts of the financial world.

“UK borrowing has never been cheaper. Outstanding resi mortgages cost 6% 10 years ago and 2.7% now; new lending is at 2.3%. Nearly half of today’s unsecured personal loans cost less than 5%; Sainsbury’s and Tesco’s banking arms are advertising unsecured loans at ~3%, some for up to 10 years in duration,” wrote Jason Napier, an equity research (banks) analyst at UBS.

With the market’s eyes fixed keenly on a deterioration in UK consumer spending that has weighed on economic growth over recent quarters, the “emperor’s well clothed state” has gone unacknowledged by the majority.

“Clearly it’s a matter of judgement, but it may be the case that the Governor thinks supermarkets offering 10 year unsecured loans for ~3% feels a bit punchy. There is also a boom in car financing,” says Powell.

Bank of England governor Mark Carney said in a September speech that UK banks have been extending too much credit to consumers at insufficient rates of interest and that the more “frothy” parts of the market should be addressed.

“This is what the data suggests. And it is what the Governor is telling us he is doing. My sense is that those hoping for a ‘dovish hike’ next week are going to be disappointed,” says Powell.

Pound to Be Left High and Dry Says JPMorgan

The Pound Sterling is at risk of being left high and dry against the Euro and other G10 counterparts over the coming weeks as the interest rate tide that buoyed it through September recedes further.

Bank of England policymakers may not be able to do enough to keep it afloat even if they do vote to hike rates at the November meeting, according to strategists at JPMorgan, who are still betting against the Pound-to-Euro rate.

“Our highest conviction macro trade in recent weeks has been short GBP as we felt that UK rate hikes were overpriced given the weak starting point for UK growth and the existential Brexit shock that continues to dominate the medium-term outlook,” says Daniel Hui, a foreign exchange strategist at JPMorgan.

The foreign exchange team at the US bank say the UK economic backdrop made it difficult enough as it was, in September, to justify embarking on an interest rate hiking cycle but observe that the economy has shown signs of slowing further since then.

“BoE expectations have come under pressure this from a combination of lacklustre growth data releases (annual growth in retails sales is now close to 1% compared to +4% when the BoE eased policy last year) together with a stream of commentary from MPC members that reveals a greater range of opinion about the timing of any monetary tightening,” says Hui, in a note written Friday.

The Pound was buoyed in September when the Bank of England said it begin withdrawing stimulus (hiking rates) over the coming months if inflation strayed further north of its 2% target and the economy remained on a steady footing.

By the end of that month the British currency had posted the strongest performance of all those in the G10 basket as traders rushed to price in a Bank of England hike in November and further action to come in 2018.

“The rate market has belatedly begun to rethink its scenario of a relatively normal rate hike as a result of more equivocal commentary from the BoE and the absence of lift in the growth numbers,” says Hui. “Next week’s 3Q GDP print is expected to confirm the UK as the clear growth laggard within G10, and so maintain the sense of drift in rate expectations and GBP.”

The BoE is expected to raise the bank rate by 25 basis points on November 02 but the number of voices questioning whether this is the right thing to do has grown in recent weeks.

“But it’s important to recognize that a less assertive BoE outlook is not the only factor weighing on GBP, as we interpret GBP’s recent moves as reflecting not only a partial retrenchment of priced hikes, but also the additional leverage of GBP to lack of progress in the Brexit talks and the increased risk of an accidental no deal,” writes Hui.

Hui notes the recent signs of progress in Brexit negotiations but flags that trade and transition talks are unlikely to begin until December at the earliest, the atmosphere around talks may remain uncomfortable for the foreseeable future and risks around sentiment to the Pound will remain high.

The Pound received a boost over the course of Friday and Monday after October’s European Council summit concluded with Brussels sounding a more conciliatory tone on the subject of Brexit negotiations, which revived hopes that “sufficient progress” could soon be made for negotiations to move onto the subjects of trade and transition.

“Our largest net position is long EUR against USD, GBP and CHF. The ECB taper announcement is expected to be marginally constructive for EUR,” says Hui. “But we don’t expect fireworks as the ECB will emphasise dovish forward rate guidance to anchor Bund yields despite what could be a sharp slowdown in the run-rate of asset purchases. EUR upside will be a grind.”

The Pound-to-Euro rate was quoted 0.04% higher against the Euro at 1.1237 during early trading in London Tuesday while Sterling was marked 0.08% higher at 1.3215 against the Dollar.

Source: Pound Sterling Live

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Pound Sterling Strengthens Vs Euro and Dollar As EU Summit Wraps Up On a Positive Note

Friday’s boost to the Pound comes closely on the heels of a sluice of bad news for the UK economy, which has recently seen consumer spending fall and the outlook for consumer credit deteriorate further.

The Pound rose strongly throughout the morning session Friday as October’s European Council summit looked set to conclude on a positive note.

Comments from German Chancellor Angela Merkel, Prime Minister Theresa May and a host of other officials were behind the lift, all of which seemed to suggest Brexit negotiations may soon move forward onto the subjects of trade and transition.

“My impression is that these talks are moving forward step by step,” Merkel told reporters. “From my side there are no indications at all that we won’t succeed.”

Markets have feared a possible delay to the progression of talks on to the subject of trade beyond December.

PM May reiterated her Florence promise that the EU will not suffer a budgetary black hole during the current spending period, as a result of Brexit, which runs into 2020.

“There is still some ways to go on Brexit,” says Theresa May. “I am ambitious and positive about the Brexit negotiations.” She also reiterated that the UK will “honour our commitments.”

Any delay of trade or transition talks beyond December is seen as raising the risk of a so called “hard Brexit”, or a “no deal Brexit”, given the time it is likely to take to agree details of a “transition deal” as well as the future relationship.

The PM’s statements on Brexit came closely on the heels of public sector net borrowing data that showed UK government borrowing rising to £5.3 billion in September, up from £5.1 billion the previous month.

Despite a rise in the headline measure, the latest borrowing figure was the lowest of any September month for a decade.

The Pound-to-Euro rate had risen 0.43% to 1.1145 a short time ahead of noon while the Pound-to-Dollar rate added 0.08% to 1.3159, making Sterling the best performer against the greenback out of the G10 basket.

Consumer and Credit Outlook Clouds Further

On Thursday, Office for National Statistics data showed retail sales falling sharply by -0.8% in September, much further than the -0.1% decline pencilled in by forecasters.

Despite this, economists still see consumer spending as having stabilised during the third quarter and are also predicting a steady performance from the economy during the period.

However, with inflation pressures already dampening spending, the outlook for consumers and credit supply to households appeared to darken further on Thursday.

“UK household debt levels are high and still growing,” says Annabel Schaafsma, head of Moody‘s EMEA consumer surveillance team. “As real income declines, UK consumers are vulnerable to an economic downturn and any increases in inflation or interest rates could cause problems for household finances, especially for those on lower incomes.”

Moody’s, the ratings agency, said the faltering outlook for the UK consumer will have an impact on credit providers who support their business using the securitisation market.

“Additionally, consumer credit has been growing in excess of the rate of household income. This suggests we will see a weakening future performance of some UK consumer securitisation deals,” says Schaafsma.

Securitisations are an important source of liquidity for banks of all sizes and also for some corporates. Even mobile phone contracts can be securitized and sold on to investors, unlocking capital and providing an instant return for originators.

However, investor demand for UK securitization deals looks set to weaken, particularly in the mortgage market.

“Moody’s expects higher delinquencies in newer, non-conforming RMBS, as opposed to older, more seasoned deals. The borrowers in newer deals are more likely to be paying higher interest rates and have a smaller safety net. Buy-to-let RMBS is very sensitive to a weaker economy and occupancy rates and rents are expected to decline,” the ratings agency says in a statement.

Bank of England Credit Survey Points To Tighter Supply 

Thursday’s Moody’s report came barely a week after Bank of England data showed default rates on credit cards and other types of unsecured loans rose during the third quarter.

Recent BoE changes to bank capital requirements for different types of consumer loans had been expected to slow the pace of lending to households during the months ahead.

But a rise in default rates over the third quarter looks as if it might accelerate the pace at which banks now cut back lending to consumers.

“Default rates on credit card lending were reported to have increased slightly in Q3, while those on other unsecured lending increased significantly,” the Bank of England says, in its latest quarterly Credit Conditions survey. “Lenders reported that the availability of unsecured credit to households decreased in Q3 and expected a significant decrease in Q4.”

Source: Pound Sterling Live

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