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Sterling heads for first weekly win against dollar in four

Sterling headed for its first positive week in four against the dollar on Friday, holding below the $1.25 mark as a week of negotiations between Britain and the European Union ended prematurely, with meetings expected to resume next week.

The pound slipped briefly in morning trading in London, a move one analyst attributed to some spillover of political uncertainty in Europe following the resignation of French prime minister Eduoard Philippe and the appointment of his successor.

By 1509 GMT, the pound was trading flat to the dollar at $1.2464.

It also traded flat against the euro, at 90.16 pence.

Sterling has risen 1.2% against the dollar this month, after losing 2.7% in June.

“The more consolidative tone of the pound is likely related to the fact that it is the worst performing G10 currency on a 1 month view – investors are likely pausing and evaluating new news,” said Jane Foley, head of FX strategy at Rabobank.

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Brexit talks this week between Britain and the EU ended early on Thursday, with a meeting between the chief negotiators on Friday cancelled.

The EU’s chief negotiator, Michel Barnier, on Thursday said serious divergences remained between the two sides after talks this week on their future relationship.

British Prime Minister Boris Johnson said on Friday he was more optimistic than Barnier that a post-Brexit trading deal could be struck, but said Britain could leave the bloc without a comprehensive agreement if needed.

Implied volatility on the pound – as shown by options markets – remains elevated compared with other currencies.

“There are some positive headlines connected with the latest Brexit talks,” Foley said.

UK Chief negotiator David Frost has described the talks as “comprehensive and useful”, she noted, while adding the fact that significant difference remain would keep investors cautious.

The longer the wait for concrete news on Brexit the more likely the pound sterling is to push lower. The huge political uncertainty suggests that volatility is likely to remain higher than other G10 peers, Foley said.

Forecasts of a deeper UK recession relative to other European countries, the possibility of negative interests from the Bank of England and Brexit have all weighed on the pound in recent weeks.

A historic slump across British businesses levelled off last month as some of the economy reopened following an easing of the coronavirus lockdown, a business survey showed.

The IHS Markit/CIPS UK Services Purchasing Managers’ Index (PMI) rose to 47.1 from 29.0 in May.

Reporting by Ritvik Carvalho

Source: UK Reuters

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Pound pushes through $1.27 for first time since March

The pound rose above $1.27 and was set for its biggest weekly gain against the dollar since the end of March on Friday, even though European Union and British negotiators said there had been little progress in Brexit trade talks.

Britain left the EU in January and there are just weeks left to extend a year-end deadline to reach a trade deal.

A transition arrangement that keeps previous rules in place during talks expires at the end of 2020 unless both sides agree to extend it this month, which Britain has said it will not do.

“The market thinks there’s still a better than 50% chance that we’ll muddle through again,” said Kit Juckes, FX analyst at Societe Generale, adding that the risk of not reaching a deal was a background worry for sterling.

The pound, which has gained more than 3 cents in a week, rose as high as $1.2705, its strongest since March 12.

Against the euro, which gained further after the European Central Bank’s latest stimulus plan, the pound reached 89.04 pence, having retreated from the 90 level it briefly broke above late on Thursday.

The pound has gained 5% against the dollar since reaching a low of $1.2075 in mid-May, but has been held back by Britain’s high coronavirus death toll, Brexit-related risks, the prospect of negative interest rates and a growing debt pile.

It gained when the Bank of England’s executive director for markets said that a negative interest rate would not be introduced in the near term.

“If the UK goes down the road of negative rates, it would be the first country with a negative current account deficit to do so, putting downward pressure on sterling,” Deutsche Bank economist Sanjay Raja and macro strategist Oliver Harvey said in a note to clients.

“This could see inflation jump at a time when the Bank is looking to shore up confidence and support the economy through the recovery,” they added.

The weakening dollar played a role in sterling’s rise.

“The Federal Reserve is employing massive monetary expansion, and political tensions in the US cement that stance even further. Both have already contributed to a rebound in GBPUSD and will continue to do so,” Thomas Flury, head of FX strategies, and Dean Turner, economist at UBS Global Wealth Management, said.

Reporting by Elizabeth Howcroft

Source: UK Reuters

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GBP: British pound tumbles as Brexit talks end in disarray

  • The British pound index declined after the third round of talks ended without a deal.
  • The UK side said the EU insistence of a “level playing field” was to blame.
  • The UK has until June 30 to request for an extension of the transition period.

The British pound dropped sharply after the European Union and the UK concluded the third round of negotiations. The pound index declined by more than 2% while the GBP/USD pair declined by almost 60 basis points.

British pound falls as Brexit talks end in disarray

The British pound sank today after the third round of talks ended in disarray as I had predicted. In a statement, David Frost, the chief UK negotiator said:

“I regret however that we made very little progress towards agreement on the most significant outstanding issues between us.”

In the statement, he said that the European Union had refused to engage on creating a good Free Trade Agreement (FTA) with the UK. He said that the main obstacle was that the EU insisted on including a set of unbalanced proposals that would bind the UK to EU laws.

In another statement, Michel Barnier, said that talks with the UK were disappointing. In his statement, he said that the EU was not going to seal a new trade deal until a level playing field was established. He said:

“We’re not going to bargain away our values for the benefit of the UK economy.”

Key Brexit issues

There are several differences between the UK and the European Union. The most basic one is that the UK insists on being an equal of the European Union. In a statement last week, Barnier said that the UK was a country of 66 million people against the EU’s population of about 450 million people.

The biggest difference between the two is that the UK insists on a free trade agreement (FTA) like the one the EU has with Canada. The Canadian deal removes most tariffs and quotas while leaving Canada to regulate itself.

The EU has rejected this this idea, saying that such a deal would not work because of the volume of trade involved. While the EU and Canada do business worth more than €72 billion, the UK exports goods worth more than £291 billion to the European Union. This represents about 44% of the total UK exports.

The EU argues that allowing the UK to regulate itself will be unfair to companies in the European Union. As such, it proposes an agreement where the UK stays within the EU regulations.

There are other differences in the Brexit talks. For example, the UK has said that it wants to control its rich fishing waters. The EU has rejected this because its fishermen catch more than 50% of their fish from the UK waters. In the statement, Frost said:

“It is hard to understand why the EU insists on an ideological approach which makes it difficult to reach a mutually beneficial agreement.”

The challenge for the UK is that Boris Johnson has said he will not ask for an extension to the transition period. With the June 30 deadline reaching, analysts believe that chances of leaving without a deal are high.

By Crispus Nyaga

Source: Invezz

SME
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Pound Sterling Bounces 0.5% against the Euro, but Outlook Remains Soft

The Pound staged a 0.50% recovery against the Euro on Tuesday, March 24 amidst a broad improvement in investor sentiment, linked to signs the China was exiting its strict quarantine aimed at thwarting the spread of the coronavirus.

Swings in investor sentiment has an impact in the flows of international capital into, and out of, the UK since global stock markets began to plunge in late February amidst investor panic over the rapidly spreading coronavirus. The swings in sentiment in turn impact the valuation of Sterling.

News that China will lift travel bans in Hubei province from Wednesday serves as a rare pice of good news for markets and prompted investors to buy discounted stocks and other ‘risk-on’ assets.

China was first to shut down owing to the spread of the virus and now appears to be the first country emerging out of the crisis.

This is a constructive development for those currencies that are most exposed to the performance of the Chinese economy, particularly the Australia Dollar and New Zealand Dollar while it also aids a recovery in overall investor sentiment generally.

However, the British Pound also sits on this spectrum, falling when stock markets are in decline and rising when they are moving higher as the UK currency is particularly prone to shifts in the inflows and outflows from the UK of investor capitall.

Stock markets rallied on the news that the easing of restrictions by Chinese authorities comes after Hubei province reported new infections dropped to zero on March 19, suggesting the spread of the disease had all but been contained.

While there are some cases of new infections, it is believed these are in citizens returning to China from other parts of the world where they would have been exposed to the virus.

Authorities have added they will lift restrictions on citizens in the town of Wuhan – the epicentre of the global virus pandemic – from April 8.

China initiated a strict lockdown in Wuhan and Hubei province on January 23, thereby restricting the movements of 60 million people and setting the Chinese economy on the path to a sharp economic slowdown that translated into significant falls for ‘risk-on’ currencies such as Sterling.

The FTSE 100 is trading 4.5% higher at the time of writing, the German DAX is up 6.6% and France’s CAC is up 5.8%. The strong recovery in Asia and Europe looks set to feed into the U.S. session where futures for the Dow and S&P 500 are aimed higher.

Pound Sterling has responded to the developments by going higher: the Pound-to-Euro exchange rate is trading 0.70% higher at 1.0843, a sharp reversal of the poor performance seen at the start of the week.

Sterling Remains Vulnerable

A surge in demand for Euros and the market’s lingering distaste for Sterling has seen the Pound-to-Euro exchange rate endure another +1.0% decline on Monday that prompted the pair to once again fallen below 1.08, a move that suggests the strength in Sterling we saw in the second half of last week was potentially a ‘dead cat’ bounce and the market is therefore still biased to weakness.

The Pound has lost 7.82% of value against the Euro in March alone, and while the pair has recovered some lost ground over recent days this remains an exchange rate that looks heavy and prone to further declines.

It appears traders are happy to sell into any strength in Sterling, confirmation of this bias was confirmed over the course of the past two trading sessions when the GBP/EUR exchange rate shot through 1.10 on Friday to only be met by heavy selling interest and fall below the 1.08 level and reach a daily low of 1.0727.

The Euro has meanwhile outperformed the majority of its peers on global FX markets, recording gains in excess of 1.0% against the Canadian Dollar, Yen, Pound and crucially, the Dollar at the start of the new week.

A 1.0% advance in the Euro-Dollar exchange rate to 1.0794 will have provided some upside impetus for the Euro to appreciate in purchasing power against the Pound.

Despite Euro strength, the sell-off in the Pound has ultimately been broad-based and is therefore suggestive of underlying weakness in the currency.

A surge in demand for UK government bonds could be a key catalyst behind the latest declines as the value of UK gilts has risen sharply in the wake of the Bank of England’s announcement last week that it would be significantly expanding its quantitative easing programme.

This involves the buying of government bonds (gilts) in the secondary market by the Bank of England: as the Bank’s actions increase demand the amount the government has to pay bond holders declines, therefore the Bank is able to keep the cost of borrowing lower than normally would be the case.

The intervention by the Bank of England comes at an opportune time for a Government that is going to have to significantly expand its spending levels in order to fight the coronavirus-inspired economic slump. This spending will ultimately be financed by borrowing and if it were not for the Bank of England stepping in to snap up Government bonds with freshly-printed money the market could start asking questions as to the ability of the UK to finance its fiscal support package.

Last week saw the Bank of England cut interest rates to 0.1% and increased its government and corporate bond holdings by £200BN in an unanimous decision in a bid to stave off the negative effects of the coronavirus pandemic.

The total value of bonds the Bank will now hold is therefore taken up to £645BN and should provide enough demand to push the yield paid by the government and corporates lower.

Bank of England, Investor Sentiment Driving Sterling Weakness
As bonds falls in value they ultimately become less attractive to international investors who might in the past have sought them out as an investment asset. Without the demand for UK assets by foreign investors Sterling is left exposed to declines.

Market data shows the yield paid on UK ten year bonds has fallen some 30 basis points over the past three days, courtesy of the Bank of England’s actions.

“The BoE asset purchases are a game-changer for GBP rates while an increasing number of risks could take EUR/GBP to parity,” says Morten Lund, US & UK analyst at Nordea Markets.

The latest bout of selling pressures could therefore be related to the Bank of England’s quantitative easing programme in the debt markets.

The coronavirus outbreak has meanwhile kicked another leg of support from underneath Sterling, as global investors sell UK assets in favour of holding onto cash, a series of events that leaves the currency potentially more exposed than many of its peers.

Because the UK runs a current account deficit – largely courtesy of the country’s tendency to import more than it exports – the Pound is left exposed to global investor sentiment.

A current deficit can persist if a country’s currency is propped up by inflows of investor capital, but when that capital dries up the currency will in theory fall until a new equilibrium is established between imports and exports.

“The UK has a twin deficit with the biggest current account deficit (as % of GDP) in G10. A constant capital inflow is therefore needed to underpin the GBP which is challenging in the present ‘dash for cash situation’,” says Lund.

With international investors running scared the positive flows of capital into the UK appears to be fading to the extent that a major move lower in the currency has been initiated, therefore the longer the current crisis in confidence persists owing to the coronavirus, the further the Pound could fall.

But there are other reasons why Lund believes Sterling has lost ground.

One reason being the UK has a large and systemic important banking sector which Lund says is particular exposed in times of credit crunches and disturbances in the global funding system.

Another reason for Sterling’s vulnerability in times of market turbulence is the impact of Brexit on how the international investor community perceives the UK.

“After years of Brexit uncertainty and low returns, the sterling has lost some of its appeal as a major reserve currency,” says Lund.

Written by Gary Howes

Source: Pound Sterling Live

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Sterling takes another big tumble as investors seek safety

The British pound fell sharply again on Monday as investors dumped currencies they consider riskier to own amid the coronavirus pandemic.

Sterling has been under pressure because of a massive wave of selling of most currencies other than the dollar, which is the world’s most liquid currency and the safe haven of choice when confidence evaporates from financial markets.

The pound has also been hit by investor concerns that Britain’s approach to dealing with the virus, which has seen a more staggered disruption to economic and everyday life than in other countries, is not the right one.

Britain’s large current account deficit has also made sterling vulnerable, while drastically poorer liquidity has exacerbated moves downwards.

Sterling fell as much as 1.6% to $1.1490 by 1550 GMT before recovering slightly.

Last week the British currency briefly touched a 35-year low of $1.1413.

Against the euro, sterling tanked by an even greater margin.

The euro added 2% to 93.61 pence, still some way off last week’s lows of 95 pence.

Some analysts have been impressed by the British policy response to the crisis, but say sterling has not benefited. The Bank of England has slashed interest rates to record lows, ramped up its quantitative easing programme and the government announced significant fiscal stimulus.

“The broken financial environment means that GBP is not able to respond to the proactive fiscal support undertaken by UK policy makers,” ING analysts said in a research note.

Kit Juckes, an analyst at Societe Generale, noted that according to positioning data, as of last Tuesday there had only been a small reduction in the long positions on the pound.

That would make the currency vulnerable to further falls as investors cut their long positions.

“Has the slide since Tuesday cleared the longs? It seems doubtful,” he said.

Currency markets were highly volatile again, with the dollar falling after the U.S. Federal Reserve announced an unprecedented scheme of credit support to help the United States economy.

The greenback later recovered some of those losses as stock markets resumed their fall and investors sought safer places to put their cash.

British flash Purchasing Managers Index survey data for March published earlier on Monday unsurprisingly fell into contraction, with the coronavirus expected to damage the economy further in the weeks ahead.

Reporting by Tommy Reggiori Wilkes

Source: UK Reuters

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Pound Sterling Recovering against the Euro and Dollar on Solid PMI Data

The British Pound was seen to be reclaiming some lost ground against the Euro and U.S. Dollar while solidifying the week’s advances against the Yen, Australian and New Zealand Dollars following the release of the highly-anticipated flash PMI readings for the UK economy.

The flash PMI data gives the first credible look at how the UK economy performed in February, and the question for foreign exchange markets heading into this morning’s data was whether the post-election economic bounce is being sustained.

The short answer? Yes.

The IHS Markit Composite PMI – which accounts for the services and manufacturing sectors – read at 53.3, this is above the 52.8 the markets was expecting and was unchanged on January’s reading.

The Manufacturing PM read at 52.8, which is above the 49.7 forecast by markets and above 50.1 reported in January. This represents a 10 month high for the sector.

The all-important Services PMI – the services sector accounts for over 80% of UK economic activity – read at 53.3, a shave lower than the 53.4 that markets were expecting, and lower than the 53.9 reported in January.

According to IHS Markit, “survey respondents noted that receding political uncertainty since the general election continued to translate into higher business activity and greater willingness to spend among clients. That said, the overall rate of new order growth eased from the 19-month peak seen in January amid a weaker expansion across the service economy.”

The data suggests the post-election bounce does appear to have sustained itself into February which should justify the Bank of England’s decision at the start of the month to keep interest rates on hold.

The recovery in UK economic activity has been a central pillar of support to the rally in Sterling’s value that has been seen in 2020, further signs of a robust economy should provide a decent element of support to the currency as the EU and UK enter what are expected to be difficult trade negotiations.

“An interest rate cut is likely to be off the table for the time being, considering the highly promising economic data from the UK. Although the forthcoming trade negotiations may dampen sentiment, the UK pound remains fundamentally undervalued,” says Marc-André Fongern, Head of FX Research at Fongern Global Forex.

Sterling Taking Cues from Stronger Dollar, Weaker Antipodean Currencies

Sterling had entered the day softer, but we reported early on that we don’t see the weakness of the past 24 hours as being anything neccessarily specific to Sterling: a look at the broader FX market shows the Pound to be advancing against other currencies and we would suggest external factors are therefore driving the main Pound exchange rates at present. But this should change in mid-morning when UK preliminary PMI data is released, a strong set of numbers could ensure the Pound ends the week on a stronger footing.

It is important to note that Sterling weaknesses comes primarily against the U.S. Dollar which remains the top performer of 2020, indeed Dollar strength is proving difficult to resist for all currencies, not just Sterling. The Pound-to-Dollar exchange rate is at 1.2892 and it looks hard to bet against further Dollar advances at this stage. “At the very least, visibility about the future has increased again for several months. The corona effect will distort economic data in the near future, which will make estimating the course for the economy beyond the virus scare increasingly difficult. In this environment, the USD will remain supported,” says Jan von Gerich, Chief Analyst at Nordea Markets.

Against the Euro, the Pound has fallen but ultimately remains well supported, particularly as the Euro is one of the worst performing major currencies of 2020 courtesy of chronically poor economic data suggesting the Eurozone economy remains in a quagmire of stagnation. The Pound-to-Euro exchange rate is quoted at 1.1945, a level that will disappoint those Euro buyers looking to transact at the big 1.20 level. The Euro has lost 0.68% of its purchasing power against the Pound over the course of the past month, and any sudden ‘snap backs’ like we have just witnessed can be expected. After all, markets never move in straight lines.

The Euro “has seen an aggressive rally higher,” says Karen Jones, Head of Technical Analysts at Commerzbank. Despite the recent weakness, Jones says the Pound-Euro exchange rate would have to fall below 1.1614 before the Pound’s multi-week period of appreciation is negated from a technical perspective.

If we look at the other Sterling-based pairs, it is against the antipodean duo of the Australian and New Zealand Dollars where we see some outperformance. A sizeable 0.52% advance against the New Zealand Dollar is being observed on Friday while against the Australian Dollar the Pound is up 0.35%.

The Australian and New Zealand Dollars appear to be suffering in sympathy with a breakdown in global investor appetite stemming from pervasive concerns regarding the coronavirus outbreak. While the outbreak itself is not throwing up negative headlines, the impact of the lengthy shut down to Chinese industry is causing concern. With Australia and New Zealand so dependent on Chinese trade, it is little wonder that the two currencies are suffering.

Then there is the Yen, the currency that has caught perhaps the most attention this week following its brutal selloff on Wednesday. There were no clear triggers behind the move, but technical factors, concerns of a looming recession and Japan’s own exposure to the coronavirus were all cited as being reasons for the sell-off.

The bottom line? Sterling looks to be a backseat driver at present and therefore the real story of the currency’s declines and advances this week have more to do with what is happening elsewhere.

However, this could all change mid-morning London time when preliminary PMI data for the UK is released.

Markets will be looking to the PMIs for confirmation that the post-election bounce in the UK economy has been sustained into February, or whether the improvement in sentiment is a blip.

Make no mistake, disappointing data could hurt Sterling at this juncture as the outperformance of the UK economy has been one of the main drivers of Sterling appreciation in 2020.

Market consensus is looking for the Services PMI to read at 53.4, the Manufacturing PMI at 49.7 and the composite at 52.8.

Should the data come in above expectation we could expect Sterling to perhaps regain some of the ground it lost against the Dollar and Euro over the past 24 hours, while we would expect it to add to the gains it has recorded against those currencies that have endured losses this week.

“UK PMIs are also expected to drop this month, particularly considering January’s major rebound. This could hurt the already softer Pound. However, a data beat could see Sterling end the week strong and re-test $1.30 and €1.20 versus the Dollar and Euro respectively,” says George Vessey, Currency Strategist at Western Union.

Written by Gary Howes

Source: Pound Sterling Live

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Pound set for biggest weekly gain in a month

The British pound extended its rally on Friday and was on track for its biggest weekly gain in a month after the Bank of England’s decision to keep interest rates steady on signs of a post-election pick-up in growth.

But analysts said the rally may be short lived. The United Kingdom exits the European Union at 2300 GMT and faces negotiations on reaching a new trade and future relationship deal with the bloc by the end of 2020 – something the EU has said will not be easy.

“Looking ahead, there are more downside risks to the pound as investors gauge the progress of the Brexit negotiations,” said Morten Lund, a strategist at Danske Bank who expects euro/pound to rise to 86 pence over the coming months.

At the stroke of midnight in Brussels, the EU will lose 15% of its economy, its biggest military spender and the world’s international financial capital – London. Britain must begin charting a course for generations to come.

But in the final countdown to Brexit, the pound was still basking in the after glow of the Bank of England’s decision to hold interest rates on Thursday at Governor Mark Carney’s final policy meeting.

Sterling gained 0.8% to as high as $1.3245, its highest level in eight days on Friday. Against the euro, the British currency rose 0.2% to 83.88 pence.

On a weekly basis, the pound was on track for a second consecutive week of gains against the dollar and its best weekly performance since end December.

Risk reversals and implied volatility gauges for the pound signalled calm over the next few months, with both indicators holding near recent lows.

Analysts also attributed the pound’s strength to broad-based dollar weakness.

Reporting by Saikat Chatterjee

Source: UK Reuters

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Sterling dips ahead of central bank rate decision; long bets trimmed

The British pound edged lower on Monday as markets await this week’s Bank of England decision on interest rates, which many analysts see as too close to call.

While weak economic data and dovish comments from BoE policymakers have fuelled speculation that the central bank could cut rates at its Jan. 30 policy meeting, though upbeat economic numbers in recent days have cast doubt over that view.

For instance, Friday’s early readings of the IHS Markit/CIPS UK Purchasing Managers’ Index (PMI) showed that Britain’s vast services sector returned to growth in January for the first time since August while manufacturing woes receded.

In subdued Monday trading, sterling dipped 0.1% to $1.3056, sliding below a more than two-week high touched briefly on Friday at $1.3180.

Against the euro, sterling hovered around 84.41 pence, broadly steady on the day.

“This (BoE) meeting follows a run of fairly weak economic data over the last few weeks but with last week’s strong employment data and better than expected flash PMIs confusing the picture,” said Deutsche Bank strategist Jim Reid.

“Our economists have expected a cut for a good couple of months now, but markets are closer to 50:50.”

Analysts noted that market positioning data released on Friday by the U.S. Commodity Futures Trading Commission suggests that, though speculators have slightly reduced net longs in sterling, they maintain an overall long position.

But market watchers believe the drop in positioning is not reflective of changing interest rate expectations. Market expectations of a rate cut dropped to 59% on Monday, compared with more than 70% a week earlier.

“Last week’s relatively marginal correction in positioning has done little to dent the view that speculative investors remain broadly sceptical about the possibility of a cut,” ING strategists said in a note.

Those bets on further gains in the British currency could be vulnerable as Thursday’s BoE meeting draws nearer, putting downward pressure on the pound, they said.

Elsewhere, the BBC reported Irish Prime Minister Leo Varadkar as saying the European Union will have the upper hand in post-Brexit trade talks with Britain and questioned Prime Minister Boris Johnson’s timetable for a deal to be truck by the end of the year.

Britain will formally leave the European Union on Friday.

Reporting by Dhara Ranasinghe

Source: UK Reuters

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Pound lower against dollar after call for UK election

The British pound fell against the U.S. dollar on Thursday following Prime Minister Boris Johnson’s call for a national election.

Johnson said he was asking parliament to approve a national election on Dec. 12 in an effort to break the political deadlock over Brexit and ensure the UK leaves the European Union.

The added uncertainty brought on by an election may hurt the pound GBP= in the near term. It was last down 0.47% at $1.285 and 1.43% lower this week. Having surged to a 5-1/2 month high on Monday, sterling fell on Tuesday after British lawmakers blocked Johnson’s plan to push through a withdrawal agreement and get the UK out of the EU on Oct. 31.

“Is the election positive for GBP? I argue no. The campaign will see polling swings, and investor inflows may slow whilst they wait for the result. It’s why we are long EUR/GBP,” Nomura analysts told clients.

With the Brexit end game more uncertain than traders thought last week, the pound was set up for another rocky period. Against the euro it dropped 0.26% to 86.38 pence per euro EURGBP=.

However, the pound has risen nearly 5% in October as the chances of a no-deal exit have been all but eliminated. It was against that backdrop the pound retraced some of its initial losses after Johnson announced his third attempt to force a snap poll.

The dollar index benefited from the move in sterling, last up 0.16% against a basket of rival currencies at 97.65 .DXY.

The euro was 0.21% lower at $1.111, though it had already sunk against the dollar prior to Johnson’s announcement. Despite some optimism from Mario Draghi’s final news conference as president of the European Central Bank on Thursday, the euro fell, pulled down by business surveys which point to stagnating economic momentum in the euro zone.

“We came into the morning thinking that there would be a bit more optimism than usual from Draghi as it is his last meeting, and we didn’t think he would want to end his tenure on a downbeat note,” said Thierry Wizman, global interest rates and currencies strategist at Macquarie Group.

“We detected some optimism towards the end of the press conference which is why the euro rallied at around 9 a.m. ET. And then it sold off. There was no news in the pipeline to help it stay up.”

Reporting by Kate Duguid

Source: UK Reuters

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Pound Sterling will Struggle to Go Much Lower vs. Euro: Nomura

The British Pound is said to already be trading at crisis levels, and as a result it will struggle to fall much lower says an analyst at leading global investment bank.

GBP is already “trading at crisis levels, and will struggle to go much lower,” says Jordan Rochester, foreign exchange strategist with Nomura in London.

That the Pound is already low by historical standards, it would suggest it will take successive bouts of bad news to really push new lows.

We wonder where such news might come from.

The Pound has recovered ground against the Euro over the course of the past 24 hours with news that Boris Johnson would replace Theresa May as Prime Minister on Wednesday.

The Pound-to-Euro exchange rate has recovered to 1.1160, having been as low as 1.1047 just last week.

“The Pound was volatile yesterday following Boris Johnson’s victory speech, as well as remarks from the BoE’s Haldane and Saunders who indicated they are not likely to vote for a rate rise in the near term. The Euro is under pressure ahead of tomorrow’s ECB policy announcement. The ECB is expected to prepare the ground for lower interest rates in September, although there is an outside chance of a reduction as early as tomorrow,” says Hann-Ju Ho, an economist with Lloyds Bank.

We would like to say the Pound is rallying exclusively on news Johnson is taking over, but we expect the picture is a great deal more nuanced: markets have known for weeks Johnson was incoming, and we believe they are now awaiting the next decisive moves on Brexit policy for guidance.

Furthermore, markets will be watching to see whether a General Election is likely in the UK before pulling the trigger on further Sterling declines.

Nomura’s Rochester also makes the point that the change at the top of the UK’s leadership extends well beyond the Prime Minister’s office:

“Over the next few weeks and months, the leadership transition will not only include a new Prime Minister, but a complete changing of the guard. In addition to a new PM, the UK can also look forward to seeing replacements for Chancellor, Cabinet, Bank of England Governor, budget and Brexit plan.

Despite the expected leadership changes, Rochester notes implied volatility levels in Sterling are still below levels seen back in March when markets were showing notable nerves over the prospect of potential big moves around the original Brexit date, and therefore “a lot of the negative news has been priced into spot,” says Rochester.

In short, the Pound is at levels that suggests it has eaten a decent share of bad news.

“GBP already trades at crisis levels and typically struggles to move much lower,” says Rochester. ‘While we acknowledge that a no-deal Brexit is a risk and would very likely record new lows in GBP, we do not expect the market to assign a higher hard Brexit premium than previously or until parliament returns after the summer break in September.”

Pound struggles to get much lower than this

Above: GBP/EUR since 2009: Sterling is at already-low levels, and it might struggle to fall lower

We believe the conditions for a recovery in Sterling over coming weeks, that coincides with Parliament’s summer break, is a distinct likelihood.

After all, this is a political currency, and with no politicians to bother it the prospect of a recovery grows.

Euro Hit by Dire Manufacturing Data

The Euro was in retreat from a steady Dollar and stronger Pound Sterling Wednesday after IHS Markit surveys for July pointed to a renewed economic slowdown in the Eurozone in the third-quarter, prompting calls for the European Central Bank (ECB) to support the economy with interest rate cuts and more quantitative easing as soon as this Thursday. 

The IHS manufacturing PMI fell to a 79-month low of 46.4 in July, from 47.6 in June, when financial markets had looked for it to remain unchanged.

However it was German manufacturing PMI which proved an eye-opener: the German Manufacturing PMI read at 43.1, well below expectations for 45.1.

Anything below 50 suggests contraction, it is therefore little wonder that Euro exchange rates are in retreat on the numbers:

The Pound-to-Euro exchange rate extended its short-term uptrend on the numbers to record a near-month high at 1.1207.

The Euro-to-Dollar exchange rate fell to close in on a new two-month low at 1.1139.

Meanwhile, the Eurozone services sector PMI fell from 53.6 to 53.3, in line with the market consensus.

The composite PMI, which combines the two previous surveys, fell from 52.2 to 51.5 this month suggesting that while the economy is still expanding it is close to stalling. 

New order flows stagnated in the manufacturing sector this month and confidence hit its lowest level since late 2014, leading companies to become more cautious about hiring new employees, IHS Markit says.

Exports were the weakest link again and many companies were forced to begin clearing old work backlogs to sustain output. “The key point here really is that the slowdown in manufacturing is now so severe that it almost surely will hit the official labour market data soon, which could change the political story, re fiscal policy, too. The chart shows that GDP growth rebounded at the start of the year, but incoming data suggest that the party ended abruptly in Q2, and the PMI now suggests a further slowdown in Q3, though it has an opportunity to recover in coming months,” says Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics.

Written by Gary Howes

Source: Pound Sterling Live