Brexit concerns cause Pound some pain

The Pound has pushed lower today as Brexit talks appear to be stumbling again.

After the publication of the EU’s draft legal exit treaty, the EU chief negotiator (Barnier) re-iterated that a transition deal was “not a given”. He also stated that there were still “significant divergences” and that the UK needed to increase the pace of the talks.

Once again the Irish border issue continues to be a major area of contention. The detailed draft exit agreement contentiously suggests that a fall back option to avoid a hard border (if no deal), would essentially be to annex Northern Ireland from the rest of the UK and keep free trade on the island of Ireland. The main border between the UK and EU would therefore be across the Irish Sea. This has obviously met huge outcry from both Theresa May and the supporting DUP.

Although none of this should come as a major surprise, it has again drawn focus back onto the issue, and the markets – being fickle as they are – have taken this as a cue to sell Sterling.   As a result, the GBP/USD has pushed down by over 1% today and trade close to a 6-week low. The GBP/EUR hit a 1-week low, having pushed down nearly 1-cent from this morning’s high.

Theresa May is due to make a key Brexit speech this Friday, where she will outline her vision for a deal and where she sees the future relationship with the EU. Without any new ideas, this could just end up being more of the same noise and therefore continue to keep dragging this whole story out, whilst the clock keeps on ticking

Dollar gets dumped on Valentine’s Day

The US Dollar fell out of love late yesterday afternoon, in a day where we saw some very volatile trading.

US inflation figures came in a lot higher than forecast around lunchtime yesterday, which led to a strong demand for the USD, as it makes more Fed rate hikes more likely this year. This led to the GBP/USD dropping around 1-cent upon the release, however, ninety minutes later we saw a surprise jump higher, in a move that carried on throughout last night.

There was not a single specific trigger event for this move, rather it’s being put down to a sudden bout of widespread USD selling, taking its lead from the equity markets and over general concerns with the US fiscal plans and their effects on a ballooning US budget deficit. Yesterday’s weaker US retail sales have also led to US growth forecasts being downgraded by many US banks. The global recovery is continuing to cause investors to move funds out of the US and to overseas.

As a result, the GBP/USD has bounced nearly 2% from yesterday’s low and trades at a 10-day high. The EUR/USD has touched the top of its range again (just over the 1.25 mark) and if it can break this range it would move into fresh highs from 2014. The risks to the USD appear tilted to the downside and a sustained push above the 1.25 mark against the EUR/USD, could compound these dollar losses further.

Sterling has held its own against the Euro and, although still subdued, the GBP/EUR trades towards the upper end of this week’s range.

Volatility in the markets has increased a lot over the past couple of weeks and is expected to continue, therefore we expect large movements in FX rates to continue. So far the rates are still playing out the ranges, so it’s worth being ambitious and aiming for the very top/bottom of the ranges for a portion of your requirements.

Pound quickly gives up BoE gains as Brexit and increased risk aversion take their toll

The Pound has quickly given up yesterday’s gains today, after the EU chief Brexit negotiator warned this morning that a transition deal was “not a given”.

The UK are set to leave the EU in March next year and a post-Brexit transition deal is wanted by both sides to help smooth out our departure.  Since the negotiations moved past the first stage, the market have been fairly complacent about a transition deal being sorted relatively quickly and therefore that we would be avoiding a ‘hard’ cliff-edged Brexit. Today’s comments, however, show that this was wrong and that there are still many obstacles in the way of getting this in place – something which businesses are desperate for.

There’s still substantial disagreements over what rules will be in place over such a period. The EU want thing to remain exactly as they are (free movement/customs/EU laws etc), but the UK want to have more control over immigration from the start and to object to any new EUR rules/laws that may come into effect over that period, amongst other things.

Clearly a transition deal is needed for both sides, so it’s likely something will eventually get put in place but this could drag out for longer than expected (like the first round did) and that clock keeps on ticking! At the moment the market will continue to be fickle and, after taking a bit of a back seat, it seems that Brexit is coming back on traders’ radars.

Continued risk aversion, with stock markets dropping around the world, has also hit Sterling in the last 24-hrs. As a result of all of this, the GBP/USD has lost over 2.5 cents from yesterday’s high and has pushed below a key support level. It will be important to see if it closes below this level going into the weekend, as that would give a bearish signal. The GBP/EUR has lost over 2-cents from yesterday’s high.

Sterling jumps on BoE’s upbeat assessment

Sterling has just jumped following a more upbeat assessment of the UK economy from the Bank of England at their latest rate-setting meeting and quarterly inflation report.

Essentially, they stated that if the economy continues to perform in line with their latest forecasts, then interest rates will need to be raised sooner and to a great degree than previously anticipated. This is therefore a positive for the Pound as it make it more attractive to investors seeking higher yields. Markets are now pricing in three rate hikes over the next three years from the BoE.

They unanimously voted to keep rates on hold this month, which was generally expected, although some had expected a couple of vote dissenters. However, it was more the language they used, which was painting a more positive picture for the economy. They also warned of the continued risks posed by Brexit though and the importance of a transition deal.

As a result, the GBP/EUR jumped 1 cent and now sits at a 1-week high. The GBP/USD move up about 1% but only back to yesterday’s high.