Currency Note

Pound rallies as no deal less likely

By Christopher Nye February 28th, 2019

The pound has rallied over the last two days, hitting a two-year high on Tuesday as a no-deal Brexit seems less likely. Yesterday’s debate in Parliament saw the Cooper amendment passed, essentially putting in stone the Prime Minister’s assurance that there would be a vote on extending Article 50 if needed.

Otherwise, it was a mixed bag from Parliament. Corbyn has said he will throw his backing behind a second referendum – among other options – after Labour’s customs union deal proposal was roundly rejected, as was the SNP’s amendment that the UK would not leave without a deal under any circumstance.

In the Eurozone, the main focus too has been Brexit, although statistical releases didn’t paint a positive picture. Industrial sentiment came in below expectations, in another sign of the Eurozone’s continued economic worries.

Meanwhile, Kim and Trump failed to reach a consensus in Vietnam. Back in the US, the dollar strengthened slightly following comments by Robert Lighthizer on the progress of US-China trade deals.

It’s impossible to predict how the markets will be impacted in the coming weeks and months – so take advantage of the buoyed pound today and speak to your Business Trader about a forward contract. This will lock in your exchange rate for up to three years, so you know exactly how much you’ll be paying, no matter what happens. And do refer any of your contacts who would benefit too from our risk-protection services.

GBP: Brexit delays strengthen pound

It’s been a good two days for the pound, hitting a high on Tuesday of 1.171. Despite a slightly downward drift this morning, it remains strong against the euro, at 1.168, as yesterday’s Parliamentary debate saw Yvette Cooper’s amendment passed, formalising the possibility to vote on extending Article 50 if both Theresa May’s Withdrawal Agreement and a no-deal are rejected.

Labour’s alternative to the government’s plan, involving a customs union and close alignment, was roundly rejected by Parliament by 323 to 240 votes. Following the defeat, Corbyn put his support behind a second referendum, with some reservations – saying ‘We will back a public vote in order to prevent a damaging Tory Brexit or a disastrous no-deal outcome. We will also continue to push for the other available options to prevent those outcomes, including a close economic relationship based on our credible alternative plan or general election’.

Meanwhile, the government has published its impact report of a no-deal Brexit, stating it could leave the UK economy 63.9% smaller after 15 years, compared to expected growth rates without a no-deal.

Today, we have the Gfk consumer confidence for February, expected to come in lower than January, already the lowest since 2013.

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EUR: Industrial sentiment index shows sharp drop

The euro continued to weaken against the pound yesterday, with GBP/EUR hitting 1.171. A possibility of an extension to Article 50 in the UK strengthened the pound, while poor economic performance in the Eurozone didn’t help the euro.

It was a busy day yesterday for economic releases. The economic sentiment and services sentiment indices came in as forecast, more or less unchanged from January. Industrial sentiment sharply deteriorated, forecast to drop from 0.6 to 0.1 but coming in at -0.4, in another sign of the Eurozone’s slowing economy.

Today is quiet on the economic release front, with focus largely on Brexit. Friday will see a bit more activity, with flash inflation rates and unemployment rates for January.

USD: Trump and Kim fail to reach deal

The dollar again weakened against the pound as GBP strengthened with a no-deal Brexit looking increasingly likely. GBP/USD hit 1.328 this morning.

Warnings from US trade representative Robert Lighthizer on the progress of US-China trade deals saw the dollar benefit slightly. Testifying to Congress, Lighthizer acknowledged that whilst progress had been made, ‘it is too early to predict the outcome’ of negotiations between Washington and Beijing, and that ‘significant structural changes’ were needed to the Chinese economy. Despite this, he later revealed that the US is abandoning its threat to raise tariffs to 25% on $200 billion of Chinese goods – signalling that a truce may, in fact, be close.

Meanwhile in Vietnam, Donald Trump and Kim Jong-un failed to reach an agreement on denuclearisation. In a news conference, Trump stated that, ‘They wanted sanctions lifted in their entirety and we couldn’t do that’. According to the President, Jong-un had agreed to the dismantling of the testing facility central to North Korea’s nuclear programme, but only on the condition that all sanctions were lifted in exchange. The US was not prepared to lift these sanctions, and so an agreement was not met.

Later today, the delayed GDP figures are released. It will be interesting to find out how America’s economy fared in the final quarter of 2018, and, if outside of expectations, we could see important movement in the rates.

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