Pounds jumps as Javid resignation indicates potential fiscal boost

The Pound moved higher yesterday following the announcement that Sajid Javid (Chancellor of the Exchequer) had resigned as Boris Johnson reshuffled his cabinet.

News of his resignation initially led to a downtick in Sterling, although this was short-lived after the UK government announced that Rishi Sunak would be his replacement. This led to a spike in the Pound as Sunak is believed to be supportive of fiscal stimulus (e.g. increased public spending/less austerity) which means there would potentially be a boost to economic growth.

Traders are therefore assuming this could reduce the pressure on the Bank of England to cut interest rates which has made the Pound more attractive to some investors. Any pronounced Pound rallies based on these assumptions, however, could be on built on weak ground as Brexit uncertainty is likely to dominate Pound sentiment. For any long-term, sustained Pound rallies, the market will need some evidence that the upcoming Brexit trade negotiations are going well and that a deal (or extension) seems likely.   

As a result, the Pound has moved above some key resistance levels. The GBP/EUR bounced around 1% and trades around a 2-month high. The GBP/USD moved to a 10-day high after traveling around 1% higher. From a technical perspective, it will be important to see if the Pound can keep hold of these gains into the weekend close. A move back below some of these key resistance levels may indicate this was short-lived rally.

Pound retreats as post-Brexit trade worries return

The Pound has given up most of the gains it made last week after the EU and the UK outlined their stances ahead of the upcoming trade negotiations.

Boris Johnson and Michel Barnier provided almost opposite positions on some key elements of the future talks which highlights how difficult these discussions might be. The EU have indicated that market access will need to be linked to an alignment to EU rules to prevent unfair competition between the two parties. However, Boris has said that there is no need for a deal to involve the UK accepting EU rules and that the UK will continue to maintain high standards. Furthermore, he doesn’t expect the EU to have to follow UK rules as a price for free trade.

Amongst other differences, the EU have insisted that any future disputes in trade would require ECJ jurisdiction but the UK wants these resolved “without ECJ jurisdiction”. Barnier has also said that a deal will have to include fisheries (as UK has rich fishing waters) but the UK have said that this doesn’t need to be included in a deal.

Boris has insisted a trade deal can be reached before the end of the transition period (31st Dec 2020) but today’s divergent messages show how difficult this task might be. If a trade deal is not reached (or no extension granted) then the UK will trade with the EU under WTO rules (aka a hard Brexit) from next year. This is viewed as very negative for Sterling due to the disruption it would be expected to cause.

Obviously it’s early days, and both sides are just setting out their stalls, but this highlights the potential risks for Sterling over the coming months should concessions be slow to appear from the talks. The longer both sides play hard ball, the more likely Sterling is to feel the pinch as traders concerns of a hard Brexit mount.

As a result, the GBP/USD has fallen over 1% today and the GBP/EUR is down a cent.

BoE keep rates on hold at 0.75%

The Bank of England have just voted to keep interest rates on hold at 0.75%.

The odds of a rate cut from this eagerly awaited decision had dropped from 70% to around 50% following solid employment figures and better-than-expected PMI surveys last week. Only two policymakers voted to cut rates by 0.25%, with the rest continuing to adopt a wait-and-see approach. This has helped support the Pound this morning after traders had taken a cautious approach ahead of the decision.

Although they haven’t cut rates this time, the statement from the BoE was relatively dovish and they’ve left the door open for a cut at some point this year (with the market now pricing in a 0.25% cut in August). Therefore, although this figure has helped lift the Pound today, the BoE are starting to lean towards a rate cut which is likely to limit any Pound gains from this vote. After the UK officially leaves the EU tomorrow night, the upcoming Brexit trade negotiations are likely to be the dominant driver of the Pound this year.

In other news, the Federal Reserve kept interest rates on hold overnight with no major surprises. The Greenback, however, has been gaining some support from safe-haven flows following the outbreak of the coronavirus disease. The markets are keeping a close eye on the developments of this disease which has infected over 7000 people. With massive flight cancellations, travel warnings, and extended holidays, the disease is impacting on financial markets.

As a result, the Pound has gained around 1-cent against both the Euro and USD and is pushing towards the upper end of its current range (highest levels of the week).

Pound recovers after decent job figures raise some doubt on BoE cut

The Pound has made back some ground this morning after the release of the latest UK job/wages figures.

The data showed that job growth was the strongest in nearly a year with employment rising by 208K versus forecasts of around 110K. Furthermore, wage numbers beat expectations at 3.2% annually and the unemployment rate remained at 3.8% in November.

Signs of weakness in the job market led to a couple of BoE policymakers voting for a rate cut last year and other policymakers have recently indicated that further stimulus might be needed. Last week’s inflation figures disappointed and this pushed the odds of a 30th January rate cut (0.25%) to around 70% .

Today’s data, however, has helped weaken the case for a BoE interest rate cut which has led to increased demand for Sterling this morning. This data set was taken before Boris’s emphatic election victory on December 12th, which some feel has improved consumer and business confidence, so it will be interesting to see how future data comes in. Traders (and the BoE) will be eyeing up this Friday’s PMI figures (9.30am) for the first post-election key data releases. A strong showing here would really make them question whether a January rate cut is the right move. Watch this space.

As a result, the Pound has clawed back around a cent against the USD and 0.75-cent against the Euro.

Pound weakens on dovish BoE and weak growth data

The Pound has lost ground this morning following weak UK growth figures and negative Bank of England policymaker comments over the weekend.

The NIESR GDP figures have estimated growth over the last 3-mths as -0.3% which is a notable miss and suggests the UK economy did mildly contract in the last quarter of 2019. Although these figures largely encompass the pre-election sentiment, it’s still not great reading for the BoE and the Pound.

Last week, Mark Carney warned that the BoE would take “prompt” action to tackle any economic downturn and had plenty of headroom and tools available to do this (i.e. interest rate cuts/QE). Over the weekend, another BoE policymaker also hinted at a possible rate cut. Gertjan Vlieghe stated that he will consider voting for a rate cut at their next meeting but will be closely monitoring how the economy has performed since the December election before making any decisions.

The next BoE rate-setting meeting isn’t until the end of the month (30tH Jan). The UK data releases between now and then will therefore take more significance compared to previous months, as Brexit has massively overshadowed these releases of late. Two of the key pieces of data will be this Wednesday’s inflation numbers and then employment/wage data out on Tuesday 21st.

As a result, the Pound has given back over 2-cents against the USD from last week’s high and now trades at a 2.5-week low. The GBP/EUR has lost around 1% from last week’s high and trades at the lowest levels since Boxing day.

Happy New Year!

We wish you all a very healthy and prosperous 2020!

Last year was very unsettled in the currency markets and this year promises to be similar. 

Sterling was sold off into the Christmas break as traders took profits on the previous General Election bounce. It staged a recovery into the new year, however, as investors reversed these profit-taking trades and recalibrated their positions with the knowledge that a hard Brexit will be avoided at the end of this month.

Brexit is likely to dominate volatility in the Pound again this year. Traders will be closely watching how trade negotiations are going over the coming months to ascertain whether or not a full agreement can be reached before the end of the transition period (31st Dec). Boris has firmed up this strict deadline by putting it into law that no extensions will be made. If no extensions are requested before July or if no agreements can be made by the end of the year, then the UK risks leaving on WTO terms (aka hard Brexit). If the risks of a cliff-edge Brexit re-appear then Sterling will come under serious pressure again. If negotiations progress well, however, then we can expect good ground to be made by the Pound. Either way, it’s likely to remain extremely volatile as the news flows back and forth.

In other news, the Euro had a relatively strong finish to the year. It looks likely the ECB will hold fire on any extra monetary stimulus for the foreseeable, as European data should show signs of improvement this year. Additionally, further support has come as the first phase of a US-China trade resolution looks to be nearly sorted which is a good sign for a full agreement being on the cards in the coming months. This helps boost general risk appetite and global growth which would bode well for both the Euro and the Pound, but likely weaken the more traditional safe-haven currencies (e.g. USD/Yen/CHF).   

Finally, alongside the key US-China trade dispute, US dollar traders will be closely tracking developments across the Pond as Mr Trump tries to win another term as President on 3rd November. Since his inauguration, Trump’s protectionist policies have had major impacts on the global economy and currency markets.

As a result, the Pound trades around the highest levels it’s been for the past couple of weeks but still off its election highs. The EUR/USD hit its highest levels since August last year having gained 2-cents last month.