Pound rallies as Brexit divorce bill agreement close

Sterling jumped overnight following reports that the UK and EU have reached a rough agreement on the divorce bill for the UK leaving the bloc.
According to the newspapers this looks to be around the 50 Billion Euro mark and it potentially brings the two sides closer to moving onto discussing the future trade arrangements and a possible transition period. A transition period should help businesses adjust to the changes, helping avoid a cliff-edge scenario, and thus ensuring a smoother exit which is generally welcomed by the business community. The huge divorce figure, however, is likely to create uproar from both the Brexiteers and Remainers and therefore keep political pressure on Theresa May.

The agreement still needs to be passed through the different member states though. This is ahead of a key EU Summit in mid-December, where they will unanimously decide whether the talks can move onto the next stage or not. If this divorce bill is settled, then another major hurdle still stands in the way which is the Irish border issue. Ireland have said that they will not accept a hard border with Northern Ireland and will use their veto unless this is resolved. Clearly, if the whole of the UK is to leave the customs union and the single market, then this will not be possible without some creative ideas or exceptions to the rules. With the Northern Ireland (UK) and Ireland both wanting to avoid a hard border, but the Tory-supporting DUP adamant that Northern Ireland must leave both customs union and single market, this is a political minefield. Maybe the UK government have some plans up their sleeves on this though and were simply holding back until the divorce issues got sorted. Watch this space.

In other news, Trump’s proposed tax reforms took a step forward last night, as two Republican holdouts dropped their objections and the budget committee voted to send the bill to be thrashed out on the Senate floor this week. This is supportive for the USD as reduced corporation tax should stimulate growth and therefore increase the odds of further rate hikes by the Fed.

As a result, the GBP/EUR is nearly 2-cents higher from yesterday’s low and trades at a 2-week high. The GBP/USD has also bounced nearly 2-cents higher from yesterday and currently trades at a 2-mth high.

Euro rallies as optimism over the region’s outlook increases

The Euro has been feeling the love this week – strengthening across the board – as their economy looks to be making a strong recovery into the back-end of this year, and also due to weakness in other major currencies (such as GBP and USD).

Figures have shown that Q3 annual growth in the Euro-zone was strong (2.5% year-on-year), with Germany leading the way with an estimated 2.8% advance from last year.  This would be the fastest pace of growth for the region for over 6.5-years and understandably this has increased the appeal of the Euro, as it increases the odds of an earlier interest rate hike from the ECB. Weakness in Sterling and the USD also increased the flows into the Euro.

The USD has lost ground as Trump continues to struggle to push through his tax reforms and, if they happen, there’s a good chance they won’t be put into play until the end of 2019, which is obviously less attractive for businesses and nearer-term US growth. The Pound continues to be plagued by political uncertainties with Brexit negotiations continuing to be moving along at a snail’s pace and divisions within Theresa May’s party and questions over the sustainability of her leadership. Furthermore, UK inflation figures came in slightly lower than expected yesterday and this morning’s job/earnings data was a mixed bag, both of which have done little to shift expectations for the next expected rate hike from the BoE (expected end of 2018).

As a result, we’ve seen a big more in the EUR/USD cross (now close to a 7-week high). This, along with Pound weakness, has dragged the GBP/EUR rate down to around a 4-week low and it trades close to a key support level (and 2-mth low). The GBP/USD has remained fairly buoyant and trades towards the upper end of the range we’ve seen this month.

Next up we have we US inflation figures this afternoon and then UK retail sales tomorrow morning.

BoE hike for first time in 10-years but remain cautious

The Bank of England have just hiked interest rates for the first time in a decade, increasing them from record lows of 0.25% to 0.5%.

This move was widely anticipated, with economists forecasting around a 90% chance going into the decision, and the Pound had strengthened heavily in the days leading up to this. Upon the release, we momentarily saw Sterling rise before being quickly sold back; in a buy the rumour, sell the fact scenario.

Although they voted 7-2 in favour of hiking rates this month, the accompanying Minutes showed that extra rate hikes weren’t imminent, due to concerns that the Brexit situation will continue to weigh on our fragile economy. It seems they’re happy for the market to be pricing in an extra quarter-point hike towards the end of next year and then another one in 2020. So, this certainly doesn’t look like the series of monetary tightening/hikes that would typically make a currency more attractive to investors.

As a result, we just lost around 1.5 cents against the Euro from this morning and around 1% against the USD. Mark Carney is due to talk in a moment’s time at the accompanying press conference (with Q&A session at the end). The market will be listening carefully for further clues for future monetary policy.