The Pound’s roller coaster ride has continued today, with GBP/EUR recovering back up to €1.17, 2 cents up on yesterday’s lows. Part of the reason is a weaker Euro. The single currency has lost value partly due to poor data from the bloc early in the day. Concerns about the global economy has also pushed investors in to safe havens, weakening other currencies like the Euro and making them cheaper to purchase.
The main reasons for the rise in Sterling, is the ongoing Brexit saga. As EU leaders have moved the cliff edge of a Hard Brexit into April, the Prime Minister has a few weeks to try and sort out the issue of an orderly withdrawal from the EU.
The EU have agreed to a short Brexit delay, to try and help her get the deal through, which could happen next week. If so, Brexit will be delayed until March to get the necessary legislation through parliament. If the deal is voted down for a third time, then there are few other options. Revoking article 50 is one, albeit unlikely. Another is a long delay to Brexit, which could lead to a general election or 2nd referendum. Markets have pushed the Pound higher on this news.
We await news on when May plans to bring the deal back, and if the ERG and DUP can hold their noses while agreeing to it.
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The Pound has fallen this morning as chances of a No-Deal Brexit have increased this week. Only last week it looked like May’s deal could go through and GBP/EUR rates touched highs of €1.18. That now seems like a very long time ago. This morning rates have dropped into the low €1.15’s after developments this week cast doubt on whether the deal will go through.
Earlier this week the speaker said the deal couldn’t be brought back before parliament unless it is different. This scuppered the PM’s plans, although she still expects to be able to bring it back for a 3rd and final time next week.
The EU yesterday said that they would only grant a delay to the process if her deal is voted through the commons, raising the chances of the UK crashing out without a deal, and weakening the Pound accordingly. Things are really on a knife edge, and I think there are now 4 possibilities left. These are below along with how each one could affect Sterling.
May’s deal is voted through parliament – This would probably send the Pound higher, possibly to €1.20 vs the Euro. It would finally kill off any chance of no-deal, remove much of the uncertainty that has been keeping the Pound under pressure, and allow us all to talk about something else while trade talks are on-going.
May’s deal is rejected, and EU grant a long extension – This would probably send the Pound crashing. There are rumours that if her deal is not voted through, the EU would only grant a long extension that could lead to another referendum or a general election. Extending would just extend uncertainty and the Pound would probably weaken considerably.
May’s deal is rejected, and the UK leaves with No Deal – this is currently the default legal position, and if this were to happen next week, I think the Pound would plunge in value. It’s impossible to know by how much it could drop, but it would probably be quite a big price correction.
May’s deal is rejected, and UK withdraw’s article 50 – This is an option, but in my view the most unlikely. The political ramifications would be enormous. The Pound would rise, but there would probably be civil unrest and cries of thwarting democracy and the will of the people.
The most likely is the deal going through and the Pound rising. The second most likely is a long extension, and the Pound dropping. It’s going to be close and currently I think it’s 50/50.
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Brexit has continued to be the main driving force in currency markets throughout March so far, with the Pound roaring ahead of its peers, despite facing a number of hurdles along the way. Today however, that rally ran out of steam, with GBP/EUR rates dropping to €1.16, as Brexit uncertainty returned to the markets.
In today’s post we’ll take a detailed look at how major currencies have performed so far this month, including GBP, EUR, USD, AUD and CAD.
After a disappointing performance in February, the Pound was back on top in March, propelled higher by improved Brexit sentiment. This upswing in Sterling appeared to be mostly down to a series of Parliamentary Brexit votes in which MPs sought to rule out a no-deal Brexit and back a delay.
However the Pound’s rise was far from smooth, with the UK currency facing considerable volatility over the month as uncertainty continues to cloud the whole process. Today, that uncertainty cause the Pound to fall by around 1% across the board.
Looking ahead, expect Brexit to continue dominating Sterling sentiment for the foreseeable future, with a delay likely to prolong the uncertainty surrounding the whole process for at least another couple of extra months. In this scenario I would expect the Pound to fall further. If however May can get her deal through, Sterling is likely to rise again.
While Brexit will probably side-line UK economic data over the coming month, investors are likely to keep a close eye on domestic GDP for any additional signs that growth may have begun to stall at the start of 2019.
The Euro struggled in March, with the single currency facing some notable headwinds due to gloomy economic data and a dovish rate decision from the European Central Bank (ECB). In terms of data, EUR investors were again left wanting as weak PMI figures and slowing industrial data in Germany stoked fears of a stagnating Eurozone.
However it was the ECB’s policy meeting in March that delivered the greatest blow to the Euro this month, with the bank both slashing its growth forecasts for 2019 as well as signalling that interest rates would remain on hold until at least 2020.
The Euro was able to pick itself back up over the past couple of weeks, lifted by renewed hopes that the Eurozone economy will not be disrupted by the UK leaving the EU without a deal. Whether the Euro is able to build on this momentum in the coming month will largely be dependent on an improvement.
The US Dollar was left adrift in late February as Donald Trump’s move to extend the trade deadline with China saw investors reduce their positions in the US currency amid renewed risk appetite. This left USD muted until the first week of March, when a sharp drop in the Euro and a weakened Pound saw investors flock to the Greenback.
However the US Dollar fell back from its best levels fairly quickly, with a worrying slump in domestic payrolls in February and softening safe-haven demand limiting the appeal of USD. Whether the US Dollar is able to bounce back again in the coming month may depend on the direction of US-China trade talks, with a positive outcome likely to further cap demand for the Greenback. This evening sees a rate decision from the FED, which could weaken the Dollar pushing up GBP/USD rates.
Trade in the Australian Dollar has been mixed over the past month, mostly as a result of shifting expectations about a US-China trade deal. While recent signals from talks have been positive, hopes of a deal being signed in the immediate future were knocked by downbeat comments from US Trade Representative Robert Lighthizer.
Domestic data also influenced AUD exchange rates in recent weeks, most notably with the release of a disappointing fourth quarter GDP reading that drove it to new multi-month lows. Moving forward the focus for AUD investors is likely to increasingly be on Australia’s economic data as markets look to gauge whether the Reserve Bank of Australia could cut interest rates this year.
The Canadian Dollar has had a pretty rough time of it in March so far, being hit by heavy losses right from the offset after Canada’s GDP came up short in the fourth quarter. This was followed by further losses after the Bank of Canada’s latest policy meeting, which saw policymakers warn that the ‘timing of future rate hikes has grown increasingly uncertain’.
While rising oil prices have helped to partially offset ‘Loonie’ losses, CAD still looks to close the month as one of the weakest currency performers.
Looking ahead, the Canadian Dollar may remain on the back foot going forward unless Canadian economic data begins to show some improvement in the weeks to come.
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The Pound remains supported, and is holding up surprisingly well, given the political uncertainty the UK currently faces. The speaker John Bercow yesterday said that the PM could not bring her deal back for a third vote as has been expected, unless it’s substantially different. Initially Sterling dipped a little on the news but quickly found its feet and this morning has recovered those losses and is now largely unchanged from yesterday’s close.
I would have expected more weakness in the Pound. Bercow’s move only increases uncertainty, with only 10 days to go before the UK officially leaves the EU. Our view is that it is still likely that May’s deal will get through next week and an extension to Article 50 is likely to get the deal through.
Of course there still remains the option that the UK could crash out without a Deal, but that is quite unlikely in my view. The other options are a lengthy delay to the whole process. This would not be helpful as any extension would only increase the uncertainty. Personally I am hopeful a deal can still be agreed, allowing all parties to move on to Trade talks.
Away from Brexit, the UK economy continues to show resilience to the pressures and uncertainty of Brexit. Unemployment figures this morning showed a drop to 3.9%, better than had been expected. Employment levels are now at their highest in almost 50 years. Average earnings were also higher than forecast, coming in at 3.4%.
Brexit developments will of course remain the main driver for the Pound, but there are some other eco-stats to watch out for in the coming days. Tomorrow we will see the latest UK Retail Sales and inflation figures. Retail Sales are important as they are seen as a good barometer of how the economy is faring as a whole. We expect a monthly rise of +0.7%.
Thursday will see the latest Bank of England decision on interest rates, and further Retail Sales numbers. I don’t expect the BoE to move rates from their 0.75%. However, anything in the minutes or the accompanying statement could cause some GBP volatility.
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Once again we find ourselves in limbo as far as exchange rates are concerned until we have further clarity regarding Brexit. We are expecting MP’s to vote for a third time this week on Prime Minister Theresa May’s Brexit deal. But what are the potential implications?
Last week MP’s rejected her latest proposal for the second time by 149 votes but backed plans to rule out leaving the EU without a deal. They also voted in favour of an extension to the process, either until the 30th Jun if the deal can be passed by the 20th, or a longer term extension, with some of the key personnel from the EU suggesting the delay could be as long as two years.
It appears Theresa May has started to gain some support with a number of MP’s reluctantly backing her plan. Consensus is they feel her deal is better than a delay or another referendum. She still has someway to go with the number of Tories backing her plan falling short of the 75 she needs.
If her momentum continues this week and she gets her deal through then the pound could and should strengthen towards 1.20 GBP/EUR and 1.35 GBP/USD. Of course the risk is should she fail for the third time and once again the pound will be stuck in limbo and the uncertainty will most likely cause the pound to fall.
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