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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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How to ride the pound sterling rollercoaster through a no-deal Brexit

Sterling has been particularly sensitive to significant developments in Westminster and Brussels – analysts and investors are watching closely.

The value of the pound affects the price of our imports, such as food and raw materials, and our exports, such as cars. So while a fall in sterling’s value might help exporters, the knock-on effects are that our weekly food shops and our overseas holidays are likely to become more expensive.

So how did we get into this situation, and what should investors do?

The UK economy was relatively stable during 2018. The labour market has strengthened, supported by a benign global growth backdrop, allowing the Bank of England to raise interest rates for the first time in a decade.

However, it’s clear that the UK has suffered a bout of idiosyncratic economic weakness since the middle of 2016, which has weighed on the exchange rate and interest rates.

The recent political instability has cast an even greater shadow of uncertainty over the UK. In fact, chances of a no-deal Brexit have probably increased slightly in the last few weeks thanks to the parliamentary deadlock. Although the majority of MPs do not want that outcome, the fear is that May will be faced with a cliff edge before a deal is done.

Parliament will no doubt keep trying to pass a deal eventually, but, as history shows, policymakers are notoriously difficult to predict, meaning that deriving an outlook for the UK feels like peering into the fog through a kaleidoscope.

Focusing on the wider outcome of Brexit on our society and economy is important, but investors will be equally concerned (if not more so) with the impact on their portfolios.

The stark fall in sterling after the EU referendum reminded Britain how much its currency matters, and why investors are right to prepare for periods of poor performance. One strategy to guard against downturns is to be globally diversified, so many investors (ourselves included) will likely have chosen to hold a larger allocation of overseas currencies.

But that doesn’t mean simply ditching sterling. Indeed, we also worry about the fate of the euro if negotiations turn sour. It is possible that the value of the euro will also slide against the US dollar even if it gains against the pound. This could have ramifications for single currency investors or those doing business on the continent.

And there is a place for sterling in your portfolio. Despite all the politics, we still think that there’s a chance of the final deal resulting in a softer Brexit, or at least a less negative exit than markets have been pricing in.

If a final deal is reached, we anticipate higher interest rates, a stronger pound, and a moderation to inflation expectations. Paradoxically, this outcome may support the euro as well, at least in a global context.

We believe that once a decision on the deal is made, investors could benefit from this subsequent rebound in sterling. If this arrives in the next few months, as expected, British holidaymakers may be in for a pleasant surprise as the pound in their pocket packs more of a punch.

However, a no-deal scenario is still a possibility, and it would likely create political and economic turmoil. We would expect to see exchange rates plummet, with the pound potentially being worth less versus the euro and dollar, leaving a monetary policy dilemma for the Bank of England.

With less room for the Bank to manoeuvre at present, maybe we would not see a repeat of the interest rate cut and quantitative easing which followed 2016’s referendum result.

With such uncertainty, the rollercoaster ride is likely to continue. Whatever happens, keep an eye on sterling – it’s in for a bumpy ride.

Source: City AM

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Sturdy sales data pushes pound higher amid Brexit concerns

The pound edged higher on Friday as strong British retail sales lifted sentiment, though investors were considering the consequences of a Brexit vote defeat in parliament for Prime Minister Theresa May.

On a weekly basis, the British currency was set for its third consecutive drop. Analysts said the latest parliamentary loss for the government, although on a symbolic vote, indicates May does not have the support of her lawmakers.

With less than six weeks before the March 29 exit date, May has stepped up efforts to convince the European Union to grant her concessions.

“The constant Brexit can-kicking has also increased the risks of a disorderly exit,” strategists at BNP Paribas said in a daily note.

May has promised that if parliament has not approved a deal by Feb. 26, she will make a statement updating lawmakers on her progress on that day and lawmakers will have an opportunity on Feb. 27 to debate and vote on the way forward.

For a factbox on what happens next, see

The pound was set to end the week on a cheerful note as data showed British retail sales rebounded in January, shaking off some of the recent gloom over the UK economy as the Brexit departure date nears.

After bouncing following the sales release, the pound held near the day’s high of $1.2839 in afternoon European trade, up 0.2 percent at $1.2824.

It performed even better against the euro, rising half a percent to 87.84 pence per euro at one point.

The euro’s decline accounted for much of the move, though. The euro fell after a European Central Bank board member said policymakers were discussing whether to issue new multi-year cheap loans to banks.

RATE HIKE BETS FALL

Dwindling expectations that the Bank of England will raise interest rates this year have weighed on the pound in recent days. Swap markets indicate a 28 percent probability rates will rise, compared with 30 percent earlier this week.

Derivatives markets painted a slightly more cautious picture for the pound, with one-month implied volatility picking up from December lows and rising to 9 vol on Friday.

Risk reversals, a market gauge of the ratio of puts to calls on a currency, indicate investors are leaning towards buying options to protect themselves against further downside in the British currency.

Source: UK Reuters

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Pound Sterling to Rise by 5% against the U.S. Dollar in 2019 says Lloyds Bank

The Britsh Pound will rise by more than 5% against the U.S. Dollar next year, according to analysts at Lloyds Bank, as an orderly exit from the EU enables the Bank of England(BoE) to lift its interest rate again just as the Federal Reserve (Fed) brings its own tightening cycle to a close.

Pound Sterling will be volatile until the end of the first-quarter 2019, the bank says, as markets fret over whether Prime Minister Theresa May will be able to pass her Withdrawal Agreement through parliament. However, ratification of the deal early next year is forecast to see the UK exit the EU in an orderly manner.

That should enable markets and the Bank of England to address mounting inflation pressures in the economy, where a falling unemployment rate has been encouraging wage growth for workers. The BoE has already flagged this repeatedly as a likely threat to its 2% inflation target over coming years.

“The BoE has been clear in its guidance, reiterating that, should the economy progress in line with its expectations, a gradual tightening of monetary conditions would be appropriate. There is broad agreement on the MPC that this is consistent with a 25bp rate hike per year over the next three years,” says Gajan Mahadevan, a strategist at Lloyds Bank.

Mahadevan says the BoE will raise the base rate again in August 2019, taking it up to 1%, after PM May is succesful in passing her Withdrawal Agreement through the House of Commons. Meanwhile, the Federal Reserve is expected to ease off on its tightening of monetary policy.

“Among key developed market economies, the US has been the outperformer for some time. Having hit an annualised rate of 4.2% in Q2, GDP growth slowed in Q3 to a still impressive 3.5%,” Mahadevan writes. “However, there are signs that the rises in interest rates over the course of the last few years are starting to take their toll.”

Mahadevan and the Lloyds team say the Federal Reserve will raise interest rates only twice in 2019 as earlier policy tightening takes its toll on the US economy, leading the central bank to bring its multi-year cycle of interest rate hikes to a close. That would mark a turning point for the U.S. Dollar, especially against the Pound.

If the Fed stops raising its interest rate at the same times as markets are becoming willing to bet more confidently on further BoE policy tightening over coming years then it could effectively pull the rug out from beneath the U.S. Dollar.

The Fed raised its interest rate to 2.5% last week, marking its fourth rate hike of 2018, but used its so-called dot plot to signal that it will raise rates on only two occassions next year.

The Dollar index has risen by 5.2% in 2018 after reversing what was once a 4% year-to-date loss wracked up mostly during the first quarter. A superior performance from the U.S. economy was behind the move, because it enabled the Fed to raise rates as economies elsewhere slowed and their respective central banks sat on their hands.

“We expect the currency pair to rally towards 1.35 by June 2019, before settling around 1.33 at year-end. However, the high degree of uncertainty, particularly around the UK’s withdrawal from the EU, means that at this stage our conviction is low,” Mahadevan writes, in a recent note to clients.

Mahadevan’s target of 1.33 for the Pound-to-Dollar rate at the end of 2019 implies a 5.1% increase from Thursday’s 1.2657 level. However, while Sterling may easily recover lost ground from the Dollar before the end of 2019, other analysts have warned that steep losses could be likely before March 2019 comes to a close.

“We will enter 2019 with the most important aspects of the Brexit situation still unresolved. December was an enormously bad month for Theresa May,” says Stephen Gallo, European head of FX strategy at BMO. “To the detriment of the GBP, the remaining Brexit permutations appear to be declining in number.”

Prime Minister Theresa May survived a leadership challenge in December but she still lacks enough support in parliament for her Brexit Withdrawal Agreement to make it onto the statute book.

Analysts and traders have been readying themselves for a seemingly inevitable defeat of the government when the House of Commons gets its “meaningful vote” on the Withdrawal Agreement in January.

Lawmakers on all sides of the House have pledged to vote against the proposals for a variety of reasons and the PM is currently expected to lose the ballot in the Commons.

Approval before March 29, 2019 is key if the UK is to avoid leaving the EU without any preferable arrangements in March 2019 and defaulting to trading with the bloc on WTO terms.

“The first permutation is a “hard Brexit” in which the UK legally exits the EU on March 29th without a deal, forcing the country to revert to WTO rules. We would assign a 45% probability to that outcome at this stage and assume a level of $1.20 in GBPUSD if that comes to pass,” Gallo writes, in a note to clients.

Source: Pound Sterling Live

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Bank of England Stand by View Pound Sterling Can Suffer Deep Falls on Disruptive Brexit

Bank of England policy makers have stood by analysis suggesting the British Pound is at risk of losing substantial ground in the event of a disruptive ‘no deal’ Brexit taking place in 2019.

“The fall (in Sterling) since the referendum represents the market’s view on a range of possible outcomes. And essentially the larger the effect on UK trade, the UK exit, the further the sterling is likely to fall, for various reasons. So at the moment what is ‘priced in’ to the level of the exchange rate is a number of possible outcomes,” says Ben Broadbent, Deputy Governor of the Bank of England.

Broadbent and other Bank of England were giving evidence to parliament’s Treasury Select Committee about a BoE report on the potential economic impact of Brexit in Britain’s parliament on Tuesday.

“So if the eventual exit is towards the better end of that range, you would expect sterling to rise from here, if it’s towards the worse end of that range, you would expect it to fall further. And generally, the greater the economic dislocation, the worse the exchange rate is going to be, there’s a direct relationship,” adds Broadbent.

Bank of England Governor Mark Carney adds that currency market participants have not yet fully factored in a disorderly Brexit into the price of Pound Sterling, suggesting to us that the Governor sees the potential for deeper falls in the value of the currency.

On November 29 the Bank of England released a ‘war gaming’ analysis of the potential impact to the UK economy of various Brexit scenarios.

Notably, a disorderly ‘no deal’ Brexit could crash Sterling, which would in turn force the Bank of England to hike interest rates sharply towards the 5.5% mark in order to combat inflation stemming from the currency’s decline.

According to the analysis, aimed at testing the resilience of the UK financial system, if Prime Minister Theresa May fails to pass her Brexit plan Sterling would fall 25% under a worst-case scenario.

Source: Pound Sterling Live

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Does this week’s data impact the GBP and FTSE 100 outlook?

This week has provided markets with a crucial insight into the UK economy with the release of inflation, jobs and retail sales figures. Those numbers are so important because they have an array of signals and consequences. Let’s take a look at how the UK economy is faring and what these data points mean for the Bank of England (BoE) and local markets going forward.

Employment

The UK jobs picture soured somewhat in September, with a rise in claimants coupled with an upward revision to the August number. The figure of 18,500 claimants is the second highest monthly figure since mid-2017. Meanwhile, the August average earnings figure rose to 2.7%, which is not far off the highest level seen over the past three years (2.8%). Put this together and you have a warning sign against the BoE raising rates (rising unemployment claims), alongside a signal that allows the BoE to worry less about the problem of falling real wages seen throughout 2018. The issue of rising inflation is certainly a problem for the BoE, but as long as wages rise by a greater amount, that worry is mitigated to an extent.

Inflation

With wages on the rise, a sharp decline in inflation has provided yet another signal that the BoE can rest easy for the time being, with consumer price index (CPI) declining from 2.7% to 2.4%; the joint lowest level since first quarter (Q1) 2017. Crucially, we also saw a sharp reduction in the core CPI reading, which strips out volatile elements such as food, energy, alcohol and tobacco items. The energy aspect is particularly important as this is an element which the central bank cannot do much about through the use of monetary policy. Thus, if the cost of petrol rises, the BoE would be foolhardy to think that they could mitigate that shift by raising rates. The fact that inflation has been declining with those more volatile aspects stripped out means that the BoE will take greater attention to the shift.

This reduction in inflation coupled with the rise in wages means that real wages are on the rise, taking some of the pressure off the BoE and lesseneing the chances of another rate rise in the near future.

Retail sales

The retail sales figure is often overlooked in terms of its impact on the economy, with the term retail typically associated with the small players in trading rather than institutional whales. However, in the economic sense, consumption is a huge determinant of growth, with household expenditure accounting for 60% of UK gross domestic product (GDP). Retail sales do not account for the total household consumption amount, yet it certainly has a significant impact on the total figure. The volatile monthly figure is less of an interest for us, yet with the yearly number declining to 3%, we are seeing continued stability following the recent recovery. That measure was below 2% for eight months between Q3 2017 and Q2 2018, so anyone worried about the declining monthly figure (-0.8%) today should look at the monthly trend to note that things are actually looking relatively rosy.

Taken in the context of the BoE, the recent recovery in retail sales will bolster the idea that growth could begin to pick up thanks to improving consumption. The rise in retail sales could point towards a strong Q3 GDP number, which could counteract any fears.

Brexit

It is important to note that while the BoE has previously showed intent to normalise rates to some extent, given the threat posed by inflation, the impact of Brexit will always remain a key determinant of whether the Monetary Policy Committee (MPC) can act. Easing real wages reduces the need to raise rates, while improving GDP prospects through the recovery in retail sales will prove that the economy could possibly handle another rate rise. However, the risk of a no-deal Brexit will loom large at the moment, making any action unlikely for the time being. A deal between the UK and EU would likely remove that barrier, and such a deal would make the pound more responsive to shifts in economic data. The decline in the pound this week has been partly due to the diminishing hopes of a deal at this week’s EU summit, but also a reaction to the falling economic data (rising claimant count and retail sales) and an easing on pressure for the BoE to act (rising wages, falling inflation).

Of course, it is obvious to keep an eye out for a Brexit deal as a key driver of price action in the pound, but be aware that a deal could open up the markets to recent economic trends. The BoE does want to raise rates again, but that will only happen if the economy is strong enough and the chance of a no-deal Brexit is negated. With retail sales pointing towards a strong Q3 growth reading, we could see a hawkish BoE soon after an agreement is found (if indeed it is). Such an event would point towards a likely rate rise soon after.

The daily chart below highlights the holding pattern we find ourselves within over the past month, with markets showing some signs of wanting to get into a relief rally in the event that a deal is reached, yet not confident enough to really follow through. Expect an initial boost to the pound if a deal is reached in the coming months, but bear in mind that such a shift could be accentuated when people realise that this would have a significant knock-on effect on the BoE’s monetary policy approach.

Interestingly, traders should remain aware of the potential counter-intuitive nature of the FTSE in all of this. The FTSE 100 has an inverse relationship to the pound, driven by the highly internationalised nature of the index. A higher pound will reduce the value of foreign earnings when they are reported back in sterling. Therefore, while many would expect to see a rise for the FTSE 100 and pound in the event of a breakthrough, there is a strong likeliness that we could see the index fall. Thus, expect to see the pound reflect improvements to the UK economy or a Brexit breakthrough, while the FTSE 100 will likely to do the opposite, as was the case on referendum day.

The weekly chart below sees breakdown from the rising wedge formation, with the price falling back towards the crucial 6841 swing low. This points towards a possible break to the downside in the event that an agreement is found in Brexit negotiations. While the trendline break is worrying for FTSE bulls, we would need to see a break below that 6841 level to signal the beginning of another leg lower for the index from here on in.

Source: IG
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Sterling falls after May bows to Brexit pressure in parliament

The pound fell on Monday as a debate in Britain’s parliament exposed the level of dissatisfaction within British Prime Minister Theresa May’s governing Conservative Party over her plans for Brexit.

The pound fell to an intraday low of $1.3223 on news that May had bowed to pressure from Brexit supporters and accepted their changes to a customs bill that underpins Britain’s exit from the EU.

“The move in sterling is pretty contained at this point but this [accepting of amendments] is being viewed by the market as a step towards a leadership contest,” said Jordan Rochester, currencies strategist at Nomura.

Eurosceptics say May’s plan leaves Britain too close to the European Union and are trying to force her to change course, while pro-EU Conservative lawmakers say it leaves the country too distant from its biggest trading partner.

Sterling has struggled to capitalise in recent weeks on signs that the economy is improving because of mounting uncertainty over whether Britain can secure a trade deal with the EU before it leaves the bloc next March.

Markets expect the Bank of England to hike interest rates in August but the British currency has fallen 9 percent since April partly because of the wrangling within May’s party.

May is expected to survive Monday’s debate on a customs law but the debate risks undermining the government and increasing the chances of an early election which would hurt the pound.

“Political uncertainty helps to explain why the pound has not strengthened yet on the back of the government’s plans for a softer Brexit,” said analysts at MUFG.

At 1545 GMT the pound was down 0.1 percent versus the dollar at $1.3224 and down 0.3 percent against the euro at 88.52 pence..

Sterling finished last week down one percent against the dollar, its biggest weekly drop since late May.

President Donald Trump’s visit to the UK last week added to uncertainty about the Brexit talks and Britain’s trade relationship with the United States after the divorce. Trump criticised May’s handling of the Brexit talks.

May attempted to face down would-be eurosceptic rebels by warning on Sunday that if they sink her premiership then they risk squandering the victory of an EU exit that they have dreamed about for decades.

Meanwhile over the weekend, German business groups told members to prepare for a hard Brexit.

Long bets on sterling have been whittled down in recent days with overall net positions mildly bearish on the currency, positioning data shows.

Source: UK Reuters

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British Pound Advances On Dollar, Slips Against the Euro in Thin Holiday Trade

Pound Sterling on front foot in final week of 2017. Economic and political news flow is thin but there’s scope for low volumes to exaggerate moves in FX.

Sterling overcame resistance from a weak US Dollar Wednesday, although a more robust performance against the greenback by the Euro helped push the Pound-to-Euro rate down by a fraction – reversing an earlier gain for the pair.

Price action comes amid a light flow of economic data and low volumes in foreign exchange markets as London, the main centre for currency trading, operates with a skeleton crew throughout much of the current week.

“The UK has returned from the long holiday weekend, though with another one coming up and the Pound in the middle of a bigger range, there doesn’t appear to be much incentive for the market to be wanting to make any big pushes,” says Joel Kruger, an FX strategist at LMAX Exchange.

The Pound was quoted 0.16% higher at 1.3394 against the US Dollar by the London close while the Pound-to-Euro rate was marked 0.20% lower at 1.1255. The Euro-to-Dollar rate was quoted 0.35% higher at 1.1899.

“The market has been consolidating but ultimately looks poised for a continuation of the 2017 uptrend, with a higher low waiting to be confirmed at 1.3027 on a break of the 2017 high at 1.3658, Kruger adds, referring to the Pound-to-Dollar rate.

“This will then open the door for a measured move upside extension back above 1.4000 and towards 1.4200 into 2018,” Kruger adds, referring to the Pound-to-Dollar rate.”

Above: Pound-to-Euro rate shown at hourly intervals.

2018 Agenda: UK Economy and Brexit

The ebb and flow of economic growth and the stop-start march of Brexit negotiations have been front and centre for the Pound in much of 2017.

Similar will be true for the currency in 2018, with traders looking to see talks on future trade and transition opened once into the New Year, while hoping for another interest rate rise from the Bank of England.

“For the next week and possibly two, we do not expect new Brexit developments as the U.K. Parliament isn’t expected to debate on the issue until mid January,” says Kathy Lien, a managing director of foreign exchange strategy at BK Asset Management.

“There are no major U.K. economic reports scheduled for release until next week at which point the pace of growth and more specifically the PMI reports will be in focus.”

Next week sees January and the New Year get underway with the monthly surveys of purchasing managers across the manufacturing, construction and services industries, which will be among the final inputs to expectations for economic growth in the final quarter and 2017 as a whole.

Talks around a possible “transition deal” will begin in January, with markets hoping to see a quick agreement struck in the first quarter, before discussions move onto future trade ties after the next European Council meeting.

Simultaneously, markets will be positioning for the next round of Bank of England growth and inflation forecasts, due for release in February. These will be key for the market’s evolving expectation of future interest rate decisions.

The Sterling Overnight Index Average (SONIA) rate most recently implied an expectation by the market that the Bank of England will wait until February 2019 before raising UK interest rates again.

However, the UK economy is recovering its lost momentumwage growth is picking up and inflation of 3.1% is still more than 100 basis points above its target, which could mean there may be scope for the BoE to signal an earlier move is possible once into the New Year.

This would be positive for the Pound, particularly when considering that markets are already braced for three Federal Reserve hikes in 2018 and that the European Central Bank is yet to announce a full exit from its quantitative easing program.

Source: Pound Sterling Live

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Pound Sterling Set for a Steep Fall Vs Euro in 2018 Say Lloyds Banking Group

Brexit and monetary policy on both sides of the English Channel will be key drivers of the Pound and Euro next year.

The Pound-to-Euro rate could be set for a steep fall in 2018, according to strategists at Lloyds Banking Group, who warn of considerable uncertainty that will surround the exchange rate in the year ahead.

Brexit and monetary policy on both sides of the English Channel will be key drivers of the Pound and Euro next year, with acrimony in Brexit negotiations and slow economic growth in the UK being enough to keep the Bank of England on hold. European Central Bankpolicy will be important too.

“Comments from Brexit Secretary David Davis and EU Chief Negotiator Michel Barnier have reinforced the challenges both sides face in coming to a comprehensive agreement,” says Gajan Mahadevan, a quantitative strategist at Lloyds Banking Group.

Fears over the path of Brexit negotiations eased in December when the European Council voted to allow EU negotiators to begin talking about trade and transition. This was after an agreement was struck covering a “divorce bill”, the safeguarding of citizens rights after the UK leaves and the Northern Irish border.

“Davis has suggested that the UK is aiming for a ‘Canada plus plus’ deal, adding that the intention through negotiations is to treat goods and services as ‘inseparable’. However, Barnier has already outlined that there will be no ‘special’ treatment for the UK financial services sector,” Mahadevan adds.

New guidelines for EU negotiators in the second phase of talks have also highlighted scope for more deadlock between the two sides during the months ahead.

Brussels wants the withdrawal commitments to be made legally binding before the UK’s exit in 2019, but to leave the bulk of trade discussions until after March 2019.

Prime Minister Theresa May and David Davis have insisted that “nothing is agreed until everything is agreed” and that the withdrawal commitments cannot be firmed up without a wider agreement.

“Some activity indicators suggest Q4 GDP growth may be slightly softer than Q3, and the health of the UK consumer is being carefully watched. With interest rate markets are not fully ‘pricing in’ a hike until Q1 2019, uncertainty shrouds the Bank rate outlook,” Mahadevan adds

The Bank of England raised interest rates by 25 basis points, to 0.50%, in November but markets are divided over how soon another hike can be expected. Interest rate markets currently suggest it will be 2019 before the BoE moves again.

Any change in this stance will either pressure or boost Sterling as bond yields and interest rate derivatives prices rise or fall in response to new developments.

“We anticipate the next hike in UK Bank rate to be in August 2018. In contrast, we see the European Central Bank (ECB) leaving interest rates unchanged next year, although it is likely to wind down its asset purchase programme,” says Mahadevan.

The European Central Bank is widely expected to wind down its quantitative easing program in 2018, which currently sees it buy €60 billion of European bonds each month in an effort to keep interest rates low and spur economic activity.

This could place upward pressure on the Euro again in 2018 although there are risks to the outlook for the common currency too, notably around the Italian election that is set to take place in the first quarter.

“Balancing all factors, we see GBP/EUR limited to a range, forecasting 1.09 for both end-2018 and end-2019,” says Mahadevan.

The fall to 1.09 in the Pound-to-Euro rate that is pencilled in by Mahadevan’s forecast implies losses of some 3.5% next year, which is broadly similar to the loss seen by the exchange rate in 2017.

“However, given the high degree of uncertainty around key drivers, there are significant risks to our profile in both directions. Unsurprisingly, this is evident in market sentiment – analysts’ forecasts for GBP/EUR range from 1.04 to 1.25, a range of just over 20%,” Mahadevan warns.

The Pound was quoted 0.04% lower at 1.1251 against the Euro during early trading Thursday.

Source: Pound Sterling Live

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No change in interest rates

This week the Bank of England voted to keep interest rates the same. The currency market tends to focus on how many members of the committee vote one way or the other and this week it was 9-0.

At the time of writing (Friday) the pound is down against the euro at 1.1330 and against the US dollar at 1.337 while the euro is at 1.18 against the US dollar. In the run-up to Christmas the markets aren’t expecting any dramatic data so it is likely to be political events affecting exchange rates.

Whatever the market rate, what is the rate you get? You certainly won’t get the rate you see online or on your iPhone. For a start there is a buy and a sell rate in the market so if you see just one rate, that will be in the middle of the buy and sell. How close you get to the market rate depends on the amount you are buying – so for a few hundred euros at the airport you could be as much as 10% away from the market, while a hundred thousand euros would be nearer to 2% at your bank or less than 1% at a broker.

The phrase ‘no commission’ is nonsense as the actual commission is hidden in the exchange rate. How much depends on your bank and the expensive rent a Bureau de Change has to pay at the airport. Using a broker often saves you money on large transactions.

Source: The Leader