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Pound Sterling Bounces 0.5% against the Euro, but Outlook Remains Soft

The Pound staged a 0.50% recovery against the Euro on Tuesday, March 24 amidst a broad improvement in investor sentiment, linked to signs the China was exiting its strict quarantine aimed at thwarting the spread of the coronavirus.

Swings in investor sentiment has an impact in the flows of international capital into, and out of, the UK since global stock markets began to plunge in late February amidst investor panic over the rapidly spreading coronavirus. The swings in sentiment in turn impact the valuation of Sterling.

News that China will lift travel bans in Hubei province from Wednesday serves as a rare pice of good news for markets and prompted investors to buy discounted stocks and other ‘risk-on’ assets.

China was first to shut down owing to the spread of the virus and now appears to be the first country emerging out of the crisis.

This is a constructive development for those currencies that are most exposed to the performance of the Chinese economy, particularly the Australia Dollar and New Zealand Dollar while it also aids a recovery in overall investor sentiment generally.

However, the British Pound also sits on this spectrum, falling when stock markets are in decline and rising when they are moving higher as the UK currency is particularly prone to shifts in the inflows and outflows from the UK of investor capitall.

Stock markets rallied on the news that the easing of restrictions by Chinese authorities comes after Hubei province reported new infections dropped to zero on March 19, suggesting the spread of the disease had all but been contained.

While there are some cases of new infections, it is believed these are in citizens returning to China from other parts of the world where they would have been exposed to the virus.

Authorities have added they will lift restrictions on citizens in the town of Wuhan – the epicentre of the global virus pandemic – from April 8.

China initiated a strict lockdown in Wuhan and Hubei province on January 23, thereby restricting the movements of 60 million people and setting the Chinese economy on the path to a sharp economic slowdown that translated into significant falls for ‘risk-on’ currencies such as Sterling.

The FTSE 100 is trading 4.5% higher at the time of writing, the German DAX is up 6.6% and France’s CAC is up 5.8%. The strong recovery in Asia and Europe looks set to feed into the U.S. session where futures for the Dow and S&P 500 are aimed higher.

Pound Sterling has responded to the developments by going higher: the Pound-to-Euro exchange rate is trading 0.70% higher at 1.0843, a sharp reversal of the poor performance seen at the start of the week.

Sterling Remains Vulnerable

A surge in demand for Euros and the market’s lingering distaste for Sterling has seen the Pound-to-Euro exchange rate endure another +1.0% decline on Monday that prompted the pair to once again fallen below 1.08, a move that suggests the strength in Sterling we saw in the second half of last week was potentially a ‘dead cat’ bounce and the market is therefore still biased to weakness.

The Pound has lost 7.82% of value against the Euro in March alone, and while the pair has recovered some lost ground over recent days this remains an exchange rate that looks heavy and prone to further declines.

It appears traders are happy to sell into any strength in Sterling, confirmation of this bias was confirmed over the course of the past two trading sessions when the GBP/EUR exchange rate shot through 1.10 on Friday to only be met by heavy selling interest and fall below the 1.08 level and reach a daily low of 1.0727.

The Euro has meanwhile outperformed the majority of its peers on global FX markets, recording gains in excess of 1.0% against the Canadian Dollar, Yen, Pound and crucially, the Dollar at the start of the new week.

A 1.0% advance in the Euro-Dollar exchange rate to 1.0794 will have provided some upside impetus for the Euro to appreciate in purchasing power against the Pound.

Despite Euro strength, the sell-off in the Pound has ultimately been broad-based and is therefore suggestive of underlying weakness in the currency.

A surge in demand for UK government bonds could be a key catalyst behind the latest declines as the value of UK gilts has risen sharply in the wake of the Bank of England’s announcement last week that it would be significantly expanding its quantitative easing programme.

This involves the buying of government bonds (gilts) in the secondary market by the Bank of England: as the Bank’s actions increase demand the amount the government has to pay bond holders declines, therefore the Bank is able to keep the cost of borrowing lower than normally would be the case.

The intervention by the Bank of England comes at an opportune time for a Government that is going to have to significantly expand its spending levels in order to fight the coronavirus-inspired economic slump. This spending will ultimately be financed by borrowing and if it were not for the Bank of England stepping in to snap up Government bonds with freshly-printed money the market could start asking questions as to the ability of the UK to finance its fiscal support package.

Last week saw the Bank of England cut interest rates to 0.1% and increased its government and corporate bond holdings by £200BN in an unanimous decision in a bid to stave off the negative effects of the coronavirus pandemic.

The total value of bonds the Bank will now hold is therefore taken up to £645BN and should provide enough demand to push the yield paid by the government and corporates lower.

Bank of England, Investor Sentiment Driving Sterling Weakness
As bonds falls in value they ultimately become less attractive to international investors who might in the past have sought them out as an investment asset. Without the demand for UK assets by foreign investors Sterling is left exposed to declines.

Market data shows the yield paid on UK ten year bonds has fallen some 30 basis points over the past three days, courtesy of the Bank of England’s actions.

“The BoE asset purchases are a game-changer for GBP rates while an increasing number of risks could take EUR/GBP to parity,” says Morten Lund, US & UK analyst at Nordea Markets.

The latest bout of selling pressures could therefore be related to the Bank of England’s quantitative easing programme in the debt markets.

The coronavirus outbreak has meanwhile kicked another leg of support from underneath Sterling, as global investors sell UK assets in favour of holding onto cash, a series of events that leaves the currency potentially more exposed than many of its peers.

Because the UK runs a current account deficit – largely courtesy of the country’s tendency to import more than it exports – the Pound is left exposed to global investor sentiment.

A current deficit can persist if a country’s currency is propped up by inflows of investor capital, but when that capital dries up the currency will in theory fall until a new equilibrium is established between imports and exports.

“The UK has a twin deficit with the biggest current account deficit (as % of GDP) in G10. A constant capital inflow is therefore needed to underpin the GBP which is challenging in the present ‘dash for cash situation’,” says Lund.

With international investors running scared the positive flows of capital into the UK appears to be fading to the extent that a major move lower in the currency has been initiated, therefore the longer the current crisis in confidence persists owing to the coronavirus, the further the Pound could fall.

But there are other reasons why Lund believes Sterling has lost ground.

One reason being the UK has a large and systemic important banking sector which Lund says is particular exposed in times of credit crunches and disturbances in the global funding system.

Another reason for Sterling’s vulnerability in times of market turbulence is the impact of Brexit on how the international investor community perceives the UK.

“After years of Brexit uncertainty and low returns, the sterling has lost some of its appeal as a major reserve currency,” says Lund.

Written by Gary Howes

Source: Pound Sterling Live

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Pound Sterling Back Under Pressure vs. Euro and Dollar, Tipped to be a Major Loser on Coronavirus-Inspired Downturn

The British Pound came under sustained selling pressure at the start of the new week as markets repriced the currency on account of ongoing coronavirus fears and expectations for turbulent EU-UK trade negotiations, which have officially commenced today.

Despite the promise of extra support from global central banks, hopes for a decisive rebound in global equity markets are yet to transpire and according to one noted UK economist the deeper the economic impact of the virus outbreak, the greater the risk to Sterling.

“Sterling relies on a steady stream of external finance to maintain its value; rising risk aversion will hurt it,” says Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, an independent economics research organsiation. “Sterling won’t be a safe haven if Covid-19 triggers a global slump.”

Global markets unravelled four months worth of gains last week and the Pound has begun to react negatively to bouts of market fear over coronavirus and is now well off its 2020 highs and looks increasingly intent on entering short-term downtrends against a number of currencies.

Market expectations for an interest rate cut at the Bank of England in March have meanwhile risen to 65% on Monday suggesting the market is currently pricing in a rate cut. When expectations for an interest rate cut at a central bank grow, the currency it issues tends to decline in value. This dynamic could well be at play. “In the wake of recent rumours regarding global interest rate cuts, the Bank of England may be forced to envisage an easing of monetary policy earlier than previously expected,” says Marc-André Fonger, Head of Research at Fongern FX.

Pantheon Economics have meanwhile on Monday said they now expect the Bank of England to deliver a rate cut at the March meeting.

“We fear… that Sterling will be one of the currencies hit hardest if the coronavirus becomes a fully-fledged pandemic and pushes the global economy into recession,” says Tombs. The Sunday Times ranked Tombs as the most accurate forecaster of the UK economy in 2014 and 2018 while Bloomberg consistently has ranked Samuel as one of the top three UK forecasters, out of pool of 35 economists, throughout 2018 and 2019.

A first case of coronavirus was identified in England on Saturday in which the disease was thought to have been “passed on in the UK,” Chief Medical Officer Chris Whitty said.

The man was found in an undisclosed part of Surrey and there is now an urgent effort underway to identify how he came to have the virus as well as all individuals who’d been in contact with him. Since then a primary school teacher Reading, Berkeshire has been confirmed to be suffering from coronavirus, leading the school to close temporarily.

According to Tombs, the UK’s still relatively small number of coronavirus cases means the Bank of England might be less inclined to cut interest rates than their global peers in countries where the outbreak might be more severe. In theory this should provide a relative advantage for Sterling currencies of central banks that are cutting rates tend to fall relative to currencies of central banks that are raising, or maintaining, their interest rates.

Pantheon Macroeconomics tell clients the U.K. economy is better placed than many other economies to weather the pandemic.

“Britain’s manufacturing sector is a minnow, while the country’s status as a net importer of tourist services – outbound tourism exceeds inbound tourism by 50% – means that a sudden grounding of all flights or increased reluctance to take trips overseas might boost domestic expenditure,” says Tombs.

However, the apparently benign status of the UK economy amidst a global outbreak might simply not be enough to keep Sterling supported.

“The Pound is a structurally weak currency and it remains sensitive to global investors’ appetite for risk,” says Tombs.

“Large capital inflows are required to keep sterling stable, given that the U.K. runs a persistent current account deficit, equal to nearly 4% of GDP. Sterling depreciated by 25% during the 2007/08 crisis primarily due to a global pullback in cross-border finance, not a material shift in interest rate differentials,” adds the economist.

Global markets continue to reflect rising investor fears that the outbreak – and attempts to prevent the disease from spreading – will cause a substantial global economic slowdown.

China this weekend released data that showed containment measures enacted at the start of January had severely restricted economic activity. The Composite PMI – which gives a snapshot of economic activity for February – fell to a record low of 28.9, having been at 53.0 in January.

During the financial crisis of 2008 the activity indicator only went as low as 38.8.

The real risk for those holding stocks, and indeed for the British Pound, is that this slowdown persists into March and other economies start to show contagion effects. However, one analyst we follow says the worst might have now been passed for China.

After weeks of preparation the EU and UK are to officially commence trade negotiations in Brussels. Round 1 commences on March 02 and ends on March 05 with four further rounds ending on Saturday May 16.

The progress of talks should form the immediate domestic focus for the Pound this week.

The two sides appear to be far apart on some key issues, particularly the degree to which the UK follows EU rules and regulations in order to achieve its desired objective of tariff-free trade.

We expect talks to be arduous and unlikely to be fully finalised before the UK’s self-imposed year-end deadline.

This is likely to create a level of uncertainty that should ensure Sterling’s strength is ultimately restricted and ensure strength remains limited. The downside potential is however elevated on any signs that the UK and EU are unable to achieve the kind of trading relationship struck by the EU and Canada in 2014.

“Prime Minister Johnson warned that if the EC denies it the Canadian-like agreement, the UK will walk away from talks at the end of Q2. The EC negotiators have made it clear that such a deal with the UK would require regulatory alignment, which the UK cannot accept. This issue is to the trade talks that Ireland was to the divorce agreement, nearly impossible to resolve without transgressing redlines of one side or the other,” says Chandler.

Written by Gary Howes

Source: Pound Sterling Live

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Pound Sterling Recovering against the Euro and Dollar on Solid PMI Data

The British Pound was seen to be reclaiming some lost ground against the Euro and U.S. Dollar while solidifying the week’s advances against the Yen, Australian and New Zealand Dollars following the release of the highly-anticipated flash PMI readings for the UK economy.

The flash PMI data gives the first credible look at how the UK economy performed in February, and the question for foreign exchange markets heading into this morning’s data was whether the post-election economic bounce is being sustained.

The short answer? Yes.

The IHS Markit Composite PMI – which accounts for the services and manufacturing sectors – read at 53.3, this is above the 52.8 the markets was expecting and was unchanged on January’s reading.

The Manufacturing PM read at 52.8, which is above the 49.7 forecast by markets and above 50.1 reported in January. This represents a 10 month high for the sector.

The all-important Services PMI – the services sector accounts for over 80% of UK economic activity – read at 53.3, a shave lower than the 53.4 that markets were expecting, and lower than the 53.9 reported in January.

According to IHS Markit, “survey respondents noted that receding political uncertainty since the general election continued to translate into higher business activity and greater willingness to spend among clients. That said, the overall rate of new order growth eased from the 19-month peak seen in January amid a weaker expansion across the service economy.”

The data suggests the post-election bounce does appear to have sustained itself into February which should justify the Bank of England’s decision at the start of the month to keep interest rates on hold.

The recovery in UK economic activity has been a central pillar of support to the rally in Sterling’s value that has been seen in 2020, further signs of a robust economy should provide a decent element of support to the currency as the EU and UK enter what are expected to be difficult trade negotiations.

“An interest rate cut is likely to be off the table for the time being, considering the highly promising economic data from the UK. Although the forthcoming trade negotiations may dampen sentiment, the UK pound remains fundamentally undervalued,” says Marc-André Fongern, Head of FX Research at Fongern Global Forex.

Sterling Taking Cues from Stronger Dollar, Weaker Antipodean Currencies

Sterling had entered the day softer, but we reported early on that we don’t see the weakness of the past 24 hours as being anything neccessarily specific to Sterling: a look at the broader FX market shows the Pound to be advancing against other currencies and we would suggest external factors are therefore driving the main Pound exchange rates at present. But this should change in mid-morning when UK preliminary PMI data is released, a strong set of numbers could ensure the Pound ends the week on a stronger footing.

It is important to note that Sterling weaknesses comes primarily against the U.S. Dollar which remains the top performer of 2020, indeed Dollar strength is proving difficult to resist for all currencies, not just Sterling. The Pound-to-Dollar exchange rate is at 1.2892 and it looks hard to bet against further Dollar advances at this stage. “At the very least, visibility about the future has increased again for several months. The corona effect will distort economic data in the near future, which will make estimating the course for the economy beyond the virus scare increasingly difficult. In this environment, the USD will remain supported,” says Jan von Gerich, Chief Analyst at Nordea Markets.

Against the Euro, the Pound has fallen but ultimately remains well supported, particularly as the Euro is one of the worst performing major currencies of 2020 courtesy of chronically poor economic data suggesting the Eurozone economy remains in a quagmire of stagnation. The Pound-to-Euro exchange rate is quoted at 1.1945, a level that will disappoint those Euro buyers looking to transact at the big 1.20 level. The Euro has lost 0.68% of its purchasing power against the Pound over the course of the past month, and any sudden ‘snap backs’ like we have just witnessed can be expected. After all, markets never move in straight lines.

The Euro “has seen an aggressive rally higher,” says Karen Jones, Head of Technical Analysts at Commerzbank. Despite the recent weakness, Jones says the Pound-Euro exchange rate would have to fall below 1.1614 before the Pound’s multi-week period of appreciation is negated from a technical perspective.

If we look at the other Sterling-based pairs, it is against the antipodean duo of the Australian and New Zealand Dollars where we see some outperformance. A sizeable 0.52% advance against the New Zealand Dollar is being observed on Friday while against the Australian Dollar the Pound is up 0.35%.

The Australian and New Zealand Dollars appear to be suffering in sympathy with a breakdown in global investor appetite stemming from pervasive concerns regarding the coronavirus outbreak. While the outbreak itself is not throwing up negative headlines, the impact of the lengthy shut down to Chinese industry is causing concern. With Australia and New Zealand so dependent on Chinese trade, it is little wonder that the two currencies are suffering.

Then there is the Yen, the currency that has caught perhaps the most attention this week following its brutal selloff on Wednesday. There were no clear triggers behind the move, but technical factors, concerns of a looming recession and Japan’s own exposure to the coronavirus were all cited as being reasons for the sell-off.

The bottom line? Sterling looks to be a backseat driver at present and therefore the real story of the currency’s declines and advances this week have more to do with what is happening elsewhere.

However, this could all change mid-morning London time when preliminary PMI data for the UK is released.

Markets will be looking to the PMIs for confirmation that the post-election bounce in the UK economy has been sustained into February, or whether the improvement in sentiment is a blip.

Make no mistake, disappointing data could hurt Sterling at this juncture as the outperformance of the UK economy has been one of the main drivers of Sterling appreciation in 2020.

Market consensus is looking for the Services PMI to read at 53.4, the Manufacturing PMI at 49.7 and the composite at 52.8.

Should the data come in above expectation we could expect Sterling to perhaps regain some of the ground it lost against the Dollar and Euro over the past 24 hours, while we would expect it to add to the gains it has recorded against those currencies that have endured losses this week.

“UK PMIs are also expected to drop this month, particularly considering January’s major rebound. This could hurt the already softer Pound. However, a data beat could see Sterling end the week strong and re-test $1.30 and €1.20 versus the Dollar and Euro respectively,” says George Vessey, Currency Strategist at Western Union.

Written by Gary Howes

Source: Pound Sterling Live

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Pound Falls Against Australian Dollar Owing to Poor UK Retail Sales

The Pound has fallen against the Australian Dollar at the end of the week after some very disappointing UK economic data.

UK Retail Sales showed a drop year on year for December to 0.9% from the expectation of 2.6%.

This highlights a real problem for the high street in what is typically one of its busiest periods of the year.

The Bank of England have already hinted that they may be gearing up to cut interest rates so with consumers not spending as much as expected could this give the central bank enough evidence to warrant a rate cut towards the end of this month?

Earlier in the week on Wednesday the UK also confirmed a fall in the inflation level. Typically if inflation is falling then a central bank will often look to cut rates to stimulate the economy. Therefore, could this be another factor in the Bank of England’s decision?

The Bank of England are due to meet on 30th January so if we see an interest rate cut happening this could cause movement for GBPAUD exchange rates.

Chinese problems cause issues for the Australian Dollar

In the meantime the Australian Dollar has also experienced its own problems. According to the recent data China’s economy has grown by just 6.1% last year which is its lowest growth on record in almost thirty years.

The US China trade wars appear to have moved forward but during last year it is clear that they had an impact on the Chinese economy.

Back in 1990 Chinese growth was 3.9% so even though the growth was measured at 6.1% it is still a lot stronger.

However, as far as the Australian Dollar is concerned as China is its largest trading partner any slowdown in the world’s second largest economy can have a negative impact on the value of the Australian Dollar.

By Tom Holian

Source: Pound Sterling Forecast

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Pound drops as Bank of England signals rate cut

The value of sterling has dropped after a trio of officials on the Bank of England’s Monetary Policy Committee (MPC) indicated that UK interest rates are likely to be cut in the coming months.

Outgoing governor Mark Carney told FTAdviser’s sister publication the Financial Times last week (January 7) that the central bank could cut interest rates to support economic growth.

Data released this morning (13 January) by the Office for National Statistics showed UK economic activity contracted by 0.3 per cent in November, the month prior to the general election, to reach a year-on-year growth of 0.6 per cent.

This and the trio’s remarks have led to sterling falling 0.7 per cent this morning and more than 2 per cent since the start of the year.

Mr Carney warned in the next economic downturn there would be limits to how much politicians can rely on central banks to boost economic growth, as most of the tools, including rate cuts and quantitative easing, are already being deployed.

But he said with the UK base rate presently at 0.75 per cent there was some scope for the UK central bank to cut rates.

UK interest rates are presently higher than those of the Eurozone and Japan, where interest rates are negative.

Mr Carney leaves his role as governor in March to be replaced by Andrew Bailey, the current FCA chief executive.

Jonathan Haskel, another member of the MPC, which sets interest rates at the Bank of England, said in a speech to the Resolution Foundation at the end of December that current economic indicators pointed to the UK economy and inflation slowing.

He said: “The global economic outlook has weakened materially since 2018, turning gloomier and less supportive of UK growth.

“This was mainly the result of heightened uncertainty combined with a slower pace of recovery in the Euro Area and, in particular, the escalation of US-China trade tensions.”

He said in the immediate aftermath of the UK voting to leave the EU the fall in the value of sterling had created a sharp increase in inflation to above 3 per cent, much higher than the inflation rate in other countries.

At first the higher prices did not, Mr Haskel said, translate into slower economic growth, as people maintained their consumption by reducing the amount they saved.

But while the UK savings rate fell to less than 3 per cent at the time, the lowest level since 1963, it has since risen to 4.5 per cent, and more recently to 6.75 per cent in the final quarter of 2019. The long-term average is 8 per cent.

If individuals are saving more and consuming less this means demand in the economy is weaker and so economic growth falls while consumption is also falling, meaning the rate of inflation falls.

Cutting interest rates makes saving cash less attractive, and so may encourage more spending, boosting growth and pushing inflation upwards. The current UK inflation rate is forecast to be below target at 1.5 per cent.

The Bank of England’s remit is to achieve inflation of around 2 per cent a year, if it falls materially below that level, then cutting rates to push inflation upwards towards the target would be the expected course of action.

A third member of the committee, Gertjan Vlieghe said he would favour an interest rate cut if economic data does not improve quickly.

He told the Financial Times on the weekend (January 12) that he expects there to be a pick up in UK economic activity as a result of the greater level of certainty as a result of Conservative party general election victory, but if this doesn’t happen, then rates will need to be cut.

He said it will be obvious by the end of January whether this has happened or not.

By David Thorpe

Source: FT Adviser

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Pound to Dollar Forecast: UK Interest Rate Uncertainty Impacts GBP to USD Rate

Pound Continues to Slip Lower Against the Dollar

The pound to US dollar rate ended last week on the backfoot, after briefly dipping below the 1.30 level on Friday. Already concerned about the Bank of England’s (BoE) interest rate outlook – which kept the possibility of cutting the cost of borrowing on the table in 2020 – the pair was left to digest the central bank’s second big announcement of the week. Mark Carney’s replacement as the governor of the BoE was revealed on Friday: Andrew Bailey, a BoE stalwart, will step into the role next month, creating further uncertainty about UK interest rates in the months ahead.

Interest rates weren’t the only factor weighing on the GBP vs USD pair. A sudden revival of no-deal Brexit fears, combined with dollar strength, also contributed to its downward spiral from a high of 1.34 on Monday. Boris Johnson’s suggestion earlier in the week that he would prevent the extension of the Brexit transition period, led to concerns that the upcoming negotiations could fail to deliver a comprehensive deal; a scenario that could leave the pound sterling to USD rate balancing on another cliff edge.

US-China Trade Doubts Boost Safe Haven Dollar

The US dollar took comfort in encouraging domestic data, before being boosted by lingering US-China trade uncertainty. Any hint of optimism that the trade war between the two superpowers can be resolved has the potential to make the safe haven dollar unappealing. Therefore, further stagnation in talks about a ‘phase one’ deal can have the opposite effect.

Looking Ahead

Britain took a huge stride towards leaving the EU when Parliament finally passed the Brexit withdrawal agreement on Friday. Mr Johnson’s reward for achieving such a thumping election majority also included an amendment outlawing an extension to the Brexit transition period. While this could still be revisited in the coming months, the pound will be hoping the UK government favours a soft Brexit agreement over splitting from the EU as soon as possible. The only UK data of note over the Christmas week is Friday’s UK finance mortgage approvals.

Will a raft of ecostats provide the US dollar with some festive cheer? Today sees the release of Durable Goods Orders, Nondefense Capital Goods Orders (excluding aircraft), New Home Sales and the Chicago Fed National Activity Index. On Thursday Initial Jobless Claims figures hit the headlines. Dollar investors will also continue to monitor developments in the US-China trade war, although the Christmas break means they probably shouldn’t hold their breath.

By Jonathan Watson

Source: Pound Sterling Forecast

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Sterling vs US Dollar Weakens as UK Economy Slows

The pound to US dollar interbank exchange rate stands at 1.3273 today. This is -1.74%, or more than -2.25 cents, below sterling’s recent 19-month high against the so-called greenback, its strongest since May 18th 2018, reached on December 12th, at 1.3509.

Sterling has fallen in value against the buck, in part because the UK economy decelerated in December, while America’s economic activity sped up, said trusted statistics released yesterday.

According to watchdog IHS Markit’s “flash” PMIs (Purchasing Managers Indices) for the UK’s services and manufacturing activity this month, the figures fell to 49.0 and 47.4 respectively.

These results were below forecasts for 49.5 for services, and 49.3 for factories, as well as both beneath the 50.0 figure that signals economic growth. This tells us that the UK economy has lost steam, weakening sterling.

US Manufacturing PMI Continues to Expand in December

Meanwhile, looking States-side, IHS Markit’s US services PMI for December rose to 52.2, above both forecasts for 51.9, as well as November’s result of 51.6. Also, US manufacturing activity came in at 52.5 this month, bang on forecasts, and only slightly below November’s 52.6.
This tells us that America’s business activity is both outperforming the UK at present, and in fact accelerating.

This reinforces US Federal Reserve Chairman Jerome Powell’s recent remarks that America’s economy is in a “good place” and cuts the odds that the US central bank will reduce interest rates below their current 1.5%-1.75% in 2020. This tends to support the US dollar.

Looking Ahead

Looking to this week, there are many factors that could affect the GBP to USD interbank exchange rate. These include the new UK Conservative government’s Brexit and spending plans, which may support the UK economy in 2020. They also include news about the US-Chinese trade war, following President Donald Trump’s recently signing the “first phase” trade deal.
They also include economic data, such as today’s UK unemployment figures for October, and the Bank of England’s interest rate decision on Thursday. Meanwhile, US economic releases include today’s industrial production figures for November, and US GDP figures for Q3 on Friday, at 13.30 GMT. So look out for these releases, for their effect on the pound vs US dollar.

By Jonathan Watson

Source: Pound Sterling Live

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Bank of England Surprise sends Pound Sterling Lower

The British Pound was put on the back foot on Thursday, November 07 after two members of the Bank of England’s Monetary Policy Committee unexpectedly voted to cut interest rates at the Bank’s November policy meeting.

Michael Saunders and Jonathan Haskel became the first MPC members to vote for lower interest rates since the Bank last cut rates in August 2016.

The surprise votes suggest the Bank is leaning towards delivering an interest rate cut in the first half of 2020, unless a notable pick up in the UK’s economic trajectory is reflected in the data.

The Pound fell on the news, as currencies tend to fall when their issuing central bank enters an interest rate cutting cycle.

“Sterling was shocked lower by a dovish Bank of England, which voted 7-2 to leave rates on hold. It was a bit of a surprise in that two members voted for an immediate cut – Saunders and Haskell both opting to cut now. This leaves the door open for a cut to come soon, signals the direction of travel and was the first split since the summer of 2018,” says Neil Wilson, Chief Market Analyst at Markets.com.

Saunders and Haskel said their vote to cut interest rates was largely owed to their view that the UK’s jobs market has begun to deteriorate somewhat – while the UK retains an ability to generate wages and employment is at all-time records, the number of vacancies in the economy has shrank dramatically of late.

The drop in vacancies suggests the jobs market could soon deteriorate and cutting interest rates would offer the economy some support under such conditions.

However, for the majority of MPC members, the economy continues to perform along a path that is consistent with keeping interest rates unchanged at 0.75%, at least for now.

“If global growth failed to stabilise or if Brexit uncertainties remained entrenched, monetary policy might need to reinforce the expected recovery in UK GDP growth and inflation,” the MPC said in a statement.

But this in itself marks a departure from previous guidance at the Bank, where the expectation was that interest rates would rise in the future, particularly under an orderly Brexit scenario; now the talk is of rates having to be cut.

In short, the Bank has flipped into rate-cutting mode and this should offer some downside to Sterling, at least in the near-term.

The Bank’s MPC will have also noted that their commitment to raising rates in the future puts them out of step with their global peers, an outcome that might disadvantage the UK economy. The U.S. Federal Reserve has been cutting interest rates of late, the European Central Bank has restarted its money printing programme and the Bank of Japan this month signalled it was looking at cutting short-term rates.

“The Bank of England seems to have finally accepted that the world is in an easing cycle and it can’t fight this tide. We can safely say the hawkish bias has gone. Because we are at the start of an election campaign the Bank was never going to vote for a cut today. But had we not been, there could have been more members calling to ease. There is the age-old debate of whether it’s best to go for an insurance cut now to see off weaker growth etc, or to keep the powder dry for when/if it goes completely wrong,” says Wilson.

“The message from the BoE is pointing to the downside for the Pound. Surprising votes for rate cuts voicing concern over domestic & global risks.Given how the UK is such an international economy, this is understandable,” says Neil Jones, head of hedge fund FX sales at Mizuho.

Markets had been anticipating the BoE would not only leave rates unchanged but that it would do so unanimously, which might explain why Sterling tumbled when the decision was published.

Dissent on the MPC brings closer a majority that might be in favour of a rate cut, and markets are not prepared for that to happen any time soon.

The Bank of England also released their Monetary Policy Report today, which contains the Bank’s forecasts for economic growth, inflation and other economic variables.

These in themselves can have an impact on the Pound as it suggests how the Bank sees the economy evolving over time.

“Looking through Brexit-related volatility, underlying UK GDP growth has slowed materially this year and a small margin of excess supply has opened up. That slowdown reflects weaker global growth, driven by trade protectionism, and the domestic impact of Brexit-related uncertainties,” the report noted.

Compared to the earlier forecasts, the Bank has this month forecast end-2019 economic growth to be at 1.0%, up from 0.9% forecast in August.

The end-2020 growth forecast was lowered to 1.6% from 1.8% expected back in August.

Inflation for end-2019 is forecast at 1.4%, down from 1.6% forecast in August, while inflation for end-2020 has been cut from 2.1% to 1.5%.

These inflation forecast cuts are sizeable and will certainly in themselves present to markets a signal that the Bank is no longer looking to raise rates.

Indeed, these inflation expectations suggest the Bank could quite comfortably justify a rate cut over coming months.

The Bank’s forecasts are however conditioned that a Brexit deal, of the kind struck between the UK and EU, is ultimately passed in coming months.

“Reflecting government policy, the MPC’s projections are now conditioned on the assumption that the UK moves to a deep free trade agreement with the EU,” said the Bank in its MPR statement.

“For our economic base case, we expect Prime Minister Boris Johnson and the Conservative Party to win a majority of seats at the election. That should enable an orderly Brexit to happen on 31 January next year. In line with the MPC’s latest guidance, we look for the BoE to hike the Bank Rate in Q3 2020 followed by another hike in 2021, by 0.25bp each time. That would take the bank rate to 1.25% by end-2020. Of course, if the election ends in a hung parliament the BoE would change its tune fast and, could, as signalled in the updated guidance, even cut rates,” says Kallum Pickering, an economist with Berenberg Bank in London.

Written by Gary Howes

Source: Pound Sterling Live

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Sterling slides back to $1.25 as economy and Brexit worries grow

The British pound fell back towards six-month lows against the dollar and the euro on Monday, with traders still nervous about a loss of momentum in the UK economy, the prospect of an interest rate cut and a new prime minister.

At the end of last week, sterling ended a nine-week losing streak against the euro and inched up from a low of $1.2439 hit at the end of June.

However, analysts are largely bearish on the pound after a run of poor economic data and signals from the Bank of England that its next move may be to cut interest rates rather than raise them, as it had previously flagged.

The pound fell 0.5% to $1.2510, while against the euro it declined 0.5% to around 90 pence.

Sterling had hit a six-month low of 90.10 pence per euro last week.

On Tuesday, employment and wage growth data for the month of May will show how the British labour market is holding up. Many economists expect the UK economy will have contracted in the second quarter.

Investors are also waiting for the outcome of the Conservative party leadership contest to replace Prime Minister Theresa May.

Eurosceptic Boris Johnson is the favourite to win against Jeremy Hunt in a vote by Conservative party members. The winner will be crowned leader – and prime minister – by the end of July.

Nomura FX strategist Jordan Rochester said the bank’s analysts had concluded that sterling was “in the value zone for now, vols are cheap and a lot of bad news is priced in, but that’s just for the next six weeks or so”.

“In September, hard Brexit risks will once again be priced in by markets,” he wrote in a research note.

Britain is scheduled to leave the European Union on Oct. 31.

David Madden, analyst at CMC Markets, noted that on a technical basis, sterling/dollar “has been driving lower since mid-March, and if the bearish move continues it might encounter support at $1.2365 region.”

Reporting by Tommy Wilkes; Editing by Jon Boyle and Kevin Liffey

Source: UK Reuters

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Sterling slides towards two-year lows as outlook darkens

The British pound fell towards its lowest levels in more than two years on Tuesday against the backdrop of a worsening economic outlook and rising fears about a no-deal Brexit under a new Prime Minister.

With a key $1.25 level against the dollar giving way in early Asian trade, traders quickly pushed the British currency down half a percent against the dollar to a level not seen since April 2017, barring a flash crash in early January.

The pound also weakened against the euro to a six-month low at 89.95 pence EURGBP=D3 and is on track for a tenth consecutive week of losses against the single currency.

“All the fundamental factors point to a weaker pound and the downward momentum is still intact,” said Lee Hardman, a currency strategist at MUFG in London.

In the latest sign of economic weakness, sales at British retailers rose at their slowest average pace on record over the past year, a survey from the British Retail Consortium showed on Tuesday.

Concerns about the worsening economic outlook in Britain – some analysts expect the economy contracted in the second quarter – encouraged Bank of England Governor Mark Carney to signal last week that the central bank may strike a more dovish tone at its August policy meeting.

The pound was trading 0.5% down versus the dollar at $1.2455 and within striking distance of an April 2017 low below $1.2409. It very briefly hit that low in January this year in chaotic trading during a currency market flash crash.

(For a graphic on ‘Sterling approaching Jan 2019 low of $1.2409’, click here tmsnrt.rs/2YCVA5j)

VOLATILE OUTLOOK
Markets are now pricing in a BoE rate cut over the next 12 months, as central banks around the world adopt an easing bias in the face of economic uncertainty and trade tensions between the United States and China.

Sterling has fallen for several days, its losses compounded by a dollar rallying after analysts scaled back expectations the Federal Reserve would cut interest rates by 50 basis points later this month.

RBC Capital Markets strategist Adam Cole noted that betting markets were now pricing in a 95% chance of eurosceptic Boris Johnson, who some investors fear will push Britain towards a no-deal Brexit, becoming the next leader of the Conservative party and Prime Minister.

“While a significant measure of Brexit risks have already been priced, the pound may still have more of its downside exposed, should the prospect of a no-deal Brexit ramp up meaningfully over the coming months,” said Han Tan, Market Analyst at FXTM.

Those risks are being priced into the currency derivative markets with the spread between three and six-month implied volatility in the pound widening to its highest levels in two months.

Latest headlines on the Brexit front have also pressured the pound lower.

Ireland will step up its preparations for a disorderly Brexit this week given the chances of Britain leaving the European Union without a deal have never been higher, foreign minister Simon Coveney said.

A spat between Britain and the United States following the leak to a British newspaper on Sunday of memos from the British ambassador to Washington also raised concerns.

Option markets also point to more weakness in the pound with only some relatively tiny options amounting to around $400 million struck around the $1.24 levels.

Economic growth data for May, due on Wednesday, will help analysts decide whether the British economy is likely to have shrunk in the second quarter after a series of disappointing business surveys.

Economists polled by Reuters expect the British economy grew 0.3% in May month-on-month, an improvement on the -0.4% in April.

Reporting by Tommy Wilkes and Saikat Chatterjee; editing by Ed Osmond

Source: UK Reuters