Marijana No Comments

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

Marijana No Comments

Pound slides on UK growth concerns, BoE rate cut bets

There was no real catalyst for this morning’s sell-off, with investors instead dumping the Pound following a dire week of UK economic data and concerns that the Bank of England could join the Federal Reserve in cutting interest rates in the second half of the year. Yesterday’s soft services index ensured that this week’s PMI prints all came in much worse-than-expected, while suggesting that the UK economy barely grew in the second quarter of the year.

Even prior to this week, investors had already begun ramping up expectations for Bank of England interest rate cuts, particularly given that the Brexit impasse has shown no signs of ending any time soon. These expectations have heightened in the past few days following some dovish comments from BoE Governor Mark Carney earlier in the week.

Financial markets are now placing around a 50% chance of a cut before the end of the year. While we think that this is a slight overreaction, the current backdrop of growing calls for BoE rate cuts and increasing bets in favour of a ‘no deal’ Brexit come the end of October are far from providing a conducive environment for Sterling strength.

Euro heads for worst week in 3 ahead of payrolls report

Elsewhere, the Euro edged modestly lower again this morning, putting it on course for its worse weekly drop in three weeks ahead of this afternoon’s US labour report.

The common currency has been firmly on the back foot in the past couple of weeks as European yields extend their move downwards. The German 10-year government bond yield has dropped particularly sharply since Mario Draghi’s dovish speech in mid-June and is now at an all-time low of -0.4%. This far from provides an attractive proposition for foreign investors.

As we mentioned yesterday, this afternoon’s payrolls report presents itself as a particularly significant event risk for the currency market. Last month’s payrolls report was uncharacteristically poor, so the bar for a rebound this month is pretty low. That being said, even a pretty big upside surprise would, in our view, be insufficient to prevent the Fed cutting rates later this may, although may be enough to quieten calls for an aggressive pace of policy easing during the rest of 2019.

Today’s payrolls report will be released at 13:30 UK time.

Written by Matthew Ryan

Source: Ebury

Marijana No Comments

Bank of England holds interest rate at 0.75% as ‘downside risks’ increase

The Bank of England on Thursday held the headline UK interest rate at 0.75%.

The central bank delivered its June interest rate decision at 12pm on Thursday. The 9-person Monetary Policy Committee (MPC) voted unanimously to hold the bank borrowing rate at 0.75%. Analysts and economists had widely forecast this outcome.

The MPC said UK economic growth appears to have “weakened slightly in the first half of the year” and said “downside risks to growth have increased.”

“Globally, trade tensions have intensified,” the MPC said in a statement. “Domestically, the perceived likelihood of a no-deal Brexit has risen. Trade concerns have contributed to volatility in global equity prices and corporate bond spreads, as well as falls in industrial metals prices. Forward interest rates in major economies have fallen materially further.”

Pound falls on decision

The pound fell against the dollar and the euro in the immediate aftermath of the Bank’s decision, although not significantly.

The pound was down about 0.1% against the euro at €1.123 10 minutes after the decision, having traded at €1.125 just before the announcement. Sterling was up 0.4% against the dollar at $1.269 but had been as high as $1.272 earlier in the morning.

The drop-off came as investors judged that Thursday’s update meant a future interest hike from the Bank of England looked less likely.

The Bank of England and governor Mark Carney have consistently said they plan to gradually raise the UK interest rate.

The MPC said on Thursday that if the economy develops “broadly in line” with forecasts and there is a smooth Brexit, then “an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate.”

However, analyst and economists say the failure to resolve Brexit means the bank is unlikely to make any major changes this year.

“Despite a growing number of hawkish signals coming from the Monetary Policy Committee, in reality the Bank’s room for manoeuvre is limited until Brexit uncertainty clears,” Tej Parikh, chief economist at the Institute of Directors, said in a statement.

The MPC admitted on Thursday: “The economic outlook will continue to depend significantly on the nature and timing of EU withdrawal.”

Brexit cloud hangs over the Bank

Despite the Bank’s signals about raising rates, Investors believe the Bank of England is more likely to cut interest rates than raise them, according to market data ahead of Thursday’s announcement.

The backdrop to Thursday’s decision was a mixed economic picture for the UK. Jobs and wage data has held up well so far in 2019, but GDP growth is sluggish and recent manufacturing data suggests it could remain that way.

The MPC said on Thursday that recent data has been “volatile, in large part due to Brexit-related effects on financial markets and businesses.”

However, the committee repeated the statement that its “response to Brexit, whatever form it takes, will not be automatic and could be in either direction.” Carney has in the past said that the Bank could raise interest rates in response to a no-deal Brexit, although economists and investors largely think he is bluffing.

Central banks load the ‘bazookas’

The Bank of England’s decision to hold rates steady came as other major central banks this week signalled intentions to loosen monetary policy.

European Central Bank chief Mario Draghi said earlier this week that more stimulus may be needed in the eurozone if conditions do not improve. The US Federal Reserve held its benchmark interest rate unchanged at 2.5% on Wednesday but signalled a future interest rate cut looks increasingly likely.

IMF head Christine Lagarde warned in January that “the world economy is growing more slowly than expected and risks are rising.” Conditions have not improved markedly since then, with key issues such as the US-China trade war and Brexit yet to be resolved.

Bank of England governor Mark Carney will give a speech at the annual Mansion House dinner in London on Thursday evening. Carney could give more details on his outlook for the UK economy and future rate movements.

By Oscar Williams-Grut

Source: Yahoo Finance UK

Marijana No Comments

Sterling set for worst week of 2019 as Brexit talks collapse

Sterling dived to a four-month low on Friday after cross-party Brexit talks collapsed and concern grew about the impact Prime Minister Theresa May’s likely resignation would have on Britain’s EU divorce.

The pound has traded in a narrow range of $1.29-1.32 since Brexit was delayed in late March, but following weeks of talks between May’s Conservatives and the opposition Labour Party that yielded nothing the currency slumped out of its narrow range.

May has agreed to set out a timetable for her departure in early June when parliamentarians are likely to again vote against her thrice-rejected EU withdrawal agreement..

That raises the prospect of a Conservative leadership battle producing a more Eurosceptic British leader who could move Britain towards a no-deal Brexit, the worst case scenario for sterling.

“What we’re seeing is the market pricing in a higher probability of an exit without a deal,” Adam Cole, chief currency strategist at RBC Capital Markets, said, noting the growing risk that the bill would fail to pass and May would depart before parliament goes into recess in late July.

“It looks increasingly likely she will be replaced by a pro-Brexit PM with no election, and that automatically increases the chances of a no-deal Brexit.”

Sterling was down for a tenth consecutive session, touching a four-month low of $1.2733 and falling 0.6% against the euro to 87.61 pence, the lowest since February 15.

It is now set for its worst week since February 2018, and a further fall would make it one of the worst weeks in well over a year.

For a graphic on Sterling set for worst week in months, see – tmsnrt.rs/2WVBGSp

Another outcome could be no Brexit at all — a boon for the pound — or the possibility of a general election and a Labour government in power.

“The market doesn’t like elections at the best of times, and given it has a natural capitalist orientation, it’s not a surprise it worries over this (possible) Labour government,” said Neil Mellor, senior currency strategist at BNY Mellon.

On Thursday, the head of Britain’s National Grid criticised Labour’s plans to re-nationalise energy networks, saying that would increase costs for consumers and might prompt legal challenges.

Next week’s European parliamentary vote is another cause for concern, with Nigel Farage’s Brexit Party on course to pick up 34% of the vote, more than the Conservative and Labour parties combined.

Reporting by Abhinav Ramnarayan, editing by Gareth Jones

Source: UK Reuters

Marijana No Comments

Sterling steady as cross-party Brexit deal hopes linger

Sterling was little changed on Monday after a newspaper report suggested the British parliament might still reach a cross-party deal on Brexit, though doubts about such an agreement kept the currency from gaining.

Up to 150 lawmakers from Britain’s opposition Labour party would reject an agreement that did not include a referendum confirming it, the Guardian newspaper reported shadow Brexit secretary Keir Starmer had said.

Many members of the ruling Conservative party oppose a second referendum, but the fact talks are still being held is keeping sterling from booking losses, analysts said.

“Most investors would see a sterling-positive view on a second referendum,” said Rabobank FX strategist Jane Foley.

Sterling was flat at $1.30 against the dollar — roughly the middle of the $1.2851-$1.3190 range of recent weeks — and 86.53 per euro.

“The market is just suffering from Brexit fatigue. UK assets are significantly underowned by global investors so if you are underweight and still see no progress on Brexit and significant volatility on other parts of your portfolio that’s what you will focus on,” said Justin Onuekwusi, portfolio manager at L&G Investment Management.

Investors will also be unwilling to commit too far either way before UK labour market data due on Tuesday. The British economy has outperformed expectations, but the market will be watching for signs that stockpiling by British companies before Brexit has hurt employment, Foley said.

“Recent better UK data are likely to be a high point in positive sentiment. Driven by stock-building, a period of payback is likely,” Natwest Markets said in a note.

With business investment curtailed by Brexit uncertainty, the Bank of England is unlikely to raise interest rates, they said.

Sterling buyers brushed aside an opinion poll that showed UK Prime Minister Theresa May’s Conservatives had slumped to fifth place before European parliamentary elections and Nigel Farage’s Brexit Party had surged.

Reporting by Abhinav Ramnarayan, editing by Larry King and Ed Osmond

Source: UK Reuters

Marijana No Comments

Sterling slides to day’s low on Brexit nerves, pressure on PM May

Sterling slid nearly half a percent on Monday on rising concerns about the progress of Brexit negotiations and worries Prime Minister Theresa May is facing a mounting challenge to her leadership.

May is set to meet Graham Brady, chairman of an influential committee representing members of parliament from her Conservative party, amid calls for her to set a date to step down, the BBC reported.

“Currently Theresa May is walking on thin ice as the latest reports indicate a revolt against her could take place. MPs (Members of parliament) are probably not satisfied with cross-party talks so far. Therefore the pound is being dragged down as another dose of uncertainty hits the market,” said Marc-André Fongern of MAF Global Forex.

The British currency was generally weak across the board, reserving some of its biggest losses against the dollar and the low yielding Japanese yen.

Against the dollar, the pound slipped as much as 0.5 percent to $1.3040 before recovering slightly to trade 0.4 percent down at $1.3051.

It also weakened a quarter of a percent against the euro at 85.69 pence and 0.7 percent against the yen at 144.21 yen.

A dollar rising at the start of the U.S. trading session also hit the pound.

“There is broad dollar strength across the board but it is being felt more acutely through sterling,” said Kamal Sharma, a director of G10 FX strategy at Bank of America Merrill Lynch.

Britain’s Conservative government and the opposition Labour Party resumed Brexit talks to try to find a way to break the deadlock in parliament over the country’s departure from the European Union.

May agreed a withdrawal deal with the EU last year, but it was rejected three times by a deeply divided British parliament. That delayed the exit date, a postponement that has weighed on the pound as investors fret about prolonged political uncertainty.

Sterling has traded in a narrow range of $1.28-$1.31 since Britain pushed its scheduled departure from the European Union back from March until Oct. 31. There is still little clarity about when, how, or even if, Brexit will happen.

Investors have been broadly impervious to tepid economic data recently and even relatively hawkish comments from the Bank of England last week failed to jolt the currency.

Overall volatility in the currency markets remained near five-year lows and net positions by hedge funds in sterling have slipped back into negative territory.

For a graphic on Sterling/dollar three-month implied volatility, see – tmsnrt.rs/2DLBsWn

Reporting by Tom Finn; Additional reporting by Saikat Chatterjee and Thyagaraju Adinarayan; Editing by Janet Lawrence and Peter Graff

Source: UK Reuters

Marijana No Comments

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

Marijana No Comments

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

Marijana No Comments

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

Marijana No Comments

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