Pound jumps on Merkel positivity over finding backstop solution

The pound has just bounced higher following some more positive comments from Germany’s Merkel this afternoon. She suggested that solutions for Brexit and the Irish backstop could be found by the 31st October deadline.

This follows on from an upbeat meeting between her and Boris Johnson yesterday afternoon where she tasked Boris to find an alternative solution to the backstop within the next 30-days. These more conciliatory tones from Europe’s biggest economy have so far been taken well by the market. As a result, the Pound’s just spiked up over 1-cent against both the Euro and USD; with the pound trading at a 3-week high.

Earlier comments from France’s president (Mr Macron) were firmer ahead of his meeting with Boris today. He re-iterated the importance of keeping the Irish backstop and the importance of protecting the European project. It will be interesting to see if we get any further developments following their meeting and after this weekend’s G7 Summit.

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!)