Pound set for a good week, particularly against the Euro

Sterling has clawed some ground back this week and looks set for its biggest weekly gain in a couple of months.

This follows on from some resilient UK economic data releases this week, including better-than-expected earnings, retail sales, and inflation figures. Previous UK data has disappointed which increased the market perspective that the Bank of England would look to loosen monetary policy soon to stimulate the economy (Pound negative). This week’s data suggests that things might not be as gloomy as previously thought.

Brexit will continue to be the biggest driver for Sterling though. We’ve seen momentum start to grow this week from MPs trying to prevent Boris Johnson from taking the UK out of the EU without a deal, which has lent some further support to the Pound. The outlook over Brexit remains unclear and lots of uncertainty lies ahead as the Brexit departure data closes in. Traders are seemingly using this week’s more upbeat mood in the Pound as a good time to cash-in on some short Sterling positions.

In other news, the Euro has come under renewed selling pressure this week as expectations increase for an announcement of an extra-large stimulus package from the ECB at next month’s meeting (so more QE etc). Coupled with some solid US data this week, traders have been shifting funds out of the Euro and into the Greenback.

As a result, this has pushed the EUR/USD down over 1% this week and to the lowest levels of the month. This has also helped Sterling gain nearly 2% against the Euro this week, pushing the GBP/EUR to a fresh 2-week high this morning. The GBP/USD is off its lows but relatively subdued due to the ongoing Dollar demand.

Pound slips as UK economic growth slides

Sterling has just dipped after official data showed that Britain’s economy shrank in the second quarter of this year.

The growth data (GDP) came in worse than expected at -0.2% versus forecasts for a flat reading. This data increases fears that the UK could be heading towards a technical recession, which is defined as two consecutive quarters of economic decline. The impact and uncertainty over Brexit has contributed a lot to this but there’s also a global slowdown in growth which is mainly attributed to the ongoing trade war between China and the US.

Since Boris Johnson’s election, the Pound has slid as fears of a no-deal Brexit increased causing traders to re-calibrate their positioning. It’s descent has been limited in the past week, however, as traders pause for breath and technical support levels provide some reprieve for the battered Pound. Furthermore, the UK government remain in summer recess until the start of September, so the market awaits any fresh Brexit developments. 

It’s likely that Boris Johnson’s government will face a vote of no confidence when the House returns on the 3rd September. With a majority of only one MP, and many Tory MPs still angry at Johnson’s Brexit approach, there is some chance of him losing this. There are concerns, however, that even if Mr Johnson were to lose this vote of confidence, that he may still be able to force a no-deal through before any general election is held (as this is the default legal position). Watch this space as lawmakers continue to look for ways to block a disorderly Brexit.

As a result, the GBP/USD is back towards the bottom of its range and testing near-term support (around lowest levels since Jan 2017). The GBP/EUR has pushed close to a 2-year low having lost around half a cent this morning.  Pound crosses have not moved that much over the past week and might continue to be relatively subdued in the short term. However, as we get closer to September there’s likely to be a renewed focus on Brexit as we get closer to crunch time (again!)

Pound hit as Johnson’s new Cabinet ramp up hardline Brexit rhetoric

The Pound has pushed lower at the start of this week as Boris Johnson’s new cabinet ministers have ramped up their hardline Brexit rhetoric. This has increased investors’ concerns that the UK are heading for a disorderly exit from the EU without any transition period.

Over the weekend, Michael Gove, who’s responsible for no-deal planning, said that the government are now “working on the assumption” of a no-deal Brexit and that it “is now a very real prospect”. Whilst they would prefer to reach a deal with the EU, he said that they wouldn’t accept small tweaks to Theresa May’s withdrawal agreement, which was rejected three times by parliament. Dominic Raab (the new foreign secretary) has said this morning that “the undemocratic backstop must go” and he re-iterated that they are turbo-charging no-deal preparations. Accordingly, Sajid Javid (the new chancellor) is expected to announce extra funding of more than £1 billion for no-deal planning.

Since Boris took power last week, the EU have continued to remain firm and stated that the withdrawal agreement is not up for renegotiation and that removing the backstop is not possible. The backstop is their way of protecting the Single Market which is one of their key objectives. Without any more concrete solutions on the Irish border issue, then it is hard to see them removing this from the deal. That said, Johnson’s team will be playing hardball to try and get some further concessions around this. Clearly, the UK and EU are (re-)drawing their battle lines, however, the same fundamental issues remain.

Johnson seems adamant to deliver on the 31st October deadline regardless of the negotiations. Obviously, this presents a significant risk to pound and is why traders have continued to sell Sterling off. UK lawmakers, however, will continue to try and find ways to prevent him forcing a no deal Brexit through. Although, even if Parliament can prevent a no deal Brexit, it then opens us up to a general election and therefore more prolonged political uncertainty.

The latest odds of a no-deal Brexit have been moving higher with some banks forecasting odds as high at 50%. Forecasts vary a lot between analysts with some feeling that a general election is more likely than a no deal Brexit on the 31st Oct. As a result, the Pound has hit the weakest levels against the USD since March 2017, having lost over 1% this weekend. The GBP/EUR has slipped nearly a cent lower and moved to an 11-day low.  

It’s hard to see many positives for the Pound at the moment with all of this no-deal Brexit chatter, the BoE moving to a more dovish stance, and the UK economy on the brink of a technical recession. However, it might find some reprieve on there being a short squeeze on Sterling sellers, as it is an extremely overcrowded trading position. Any bounce on this though could be short-lived until we see any major change in Brexit.

Boris wins Tory leadership election

After winning roughly two thirds of the Tory memberships’ vote, Boris Johnson has just been announced as the new Tory leader and will officially become prime minister tomorrow.

This was widely expected and the market will now be looking at how many more ministerial resignations will follow this result and, more importantly, who Boris will choose to make up his new cabinet. Investors will also be analysing how seriously he is prepared to pursue a no-deal Brexit after his aggressive tone in the leadership campaign.  

He will certainly have a tough job on his hands as he tries to bring his party and the country together. The numbers in parliament remain the same, with the Tories only having a slim majority from the support of the DUP, and his own party look set to block his no-deal Brexit plan.  

The Pound has remained fairly steady so far, as the result had been largely priced-in over the past few weeks. Although we might expect to see a bit of profit-taking on the Pound’s previous fall and therefore a bit of a bounce. Sterling gains should remain relatively capped, however, as the uncertainty and risk of a no-deal still remain. Furthermore, the Bank of England continue to be more pessimistic about the economic outlook which should also keep the Pound subdued. Until we see any positive Brexit news/developments (e.g. some sort of resolution over the Irish border), then any significant gains are unlikely.

We will have to wait and see how the new negotiations with the EU work out. It should certainly be an interesting few weeks.

 

Pound gains on indications EU open to revisiting alternative Irish border ideas

The Pound has recovered some ground this morning on signs that the EU might be open to further talks around the contentious Irish border issue.

Mr Barnier, the chief EU Brexit negotiator, said he was open to look at alternative arrangements for the border. Previously, the EU have categorically ruled out revisiting the withdrawal agreement, of which the Irish backstop is a key part, so his comments suggest a slight change of tone. That said, he stated that there is no “easy solution” to the issue and that it will take a long time to find possible alternatives.

Additionally, the Irish prime minister (Varadkar) has also said this morning that Ireland are open to finding genuine solutions to avoid a hard border and offered a more positive tone. As it stands, the most likely plan is to find technological solutions to prevent a hard border and allow goods and people to flow (relatively) freely between the two countries.

In other news, UK retail sales beat estimates this morning with a strong showing from non-food stores and an increase in the sale of second-hand goods. This has further supported the Pound this morning but ultimately does little to change the overall bigger picture. We would need a consistent run of positive economic data releases to change the BoE and markets’ outlooks (or obviously some extremely positive Brexit news).

As a result, the Pound has reclaimed nearly a cent against both the USD and Euro from yesterday’s fresh lows.  Traders’ eyes will now move onto UK Parliament to see if the latest attempt to block a no-deal Brexit will gain some legs.