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Sterling struggles to rise above $1.39 as Brexit nerves grow

Sterling climbed on Monday and held near the day’s highs as risk appetite prompted investors to buy the currency but concerns over progress in Brexit negotiations limited the gains.

“There is plenty of noise out there and while expectations of a UK rate hike is about 70 percent priced in by markets, the outcome of the talks later this month is key,” said Marc Ostwald, a global strategist at ADM Investor Services International in London said.

The pound rose 0.4 percent to $1.3905, broadly in line with gains registered by other currencies against the dollar, but it is still some way below a post-Brexit referendum high of $1.4346 in late January.

Strong U.S. job growth data on Friday was balanced by slower increases in wages, resulting in money market traders sticking to bets that the Federal Reserve would raise interest rates three times this year. This encouraged investors to add bets against the struggling dollar.

Sterling also edged 0.2 percent higher to 88.65 pence to the euro.

Latest positioning data also indicated an undercurrent of nervousness about the British currency, with net long sterling positions slashed to their lowest since early December.

Worries have grown that Britain and EU officials would fall short of securing a transition arrangement at a March 22-23 summit as differences have grown in recent days. Such an outcome would question market expectations of a 25 basis point rate increase by the Bank of England in May.

“We expect euro/sterling to be volatile ahead of the summit due to conflicting headlines we have seen in recent weeks and as such we remain cautious on the British currency’s outlook,” said Morten Helt, a currency strategist at Danske Bank.

Money markets are pricing in a 70 percent probability of another UK rate rise by May, compared with virtually nil in January.

Finance minister Philip Hammond looks set to announce Britain’s smallest budget deficit since 2002 this week but he is still likely to resist calls to loosen his grip on public spending for now.

Source: UK Reuters

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What Can We Expect from the UK’s Interest Rates This Year?

With the growth rate being above expectations in the final quarter of 2017, the possibility of a rise in the United Kingdom (UK) base rate could happen earlier than foreseen. Yet, speaking on a panel at the World Economic Forum in Davos, the governor of the Bank of England (BoE), Mark Carney, pointed out that BoE rates are heavily reliant on the outcome of the Brexit negotiations. He also pointed to the fact that the UK’s economic performance forecast was previously revised down by the BoE, amid the uncertainty linked to leaving the European Union (EU).

Last November, after an increase in the UK’s interest rates from a record low of 0.25% to 0.5%, speculation about the BoE’s next move has already started. This was the first rise in more than a decade, prompted by the inability of wages to keep up with inflation. During the announcement, Mark Carney insinuated the possibility of two hikes in the next three years.

Generally, increases in interest rates, known as tightening policies, are adopted by central banks when economies are growing rapidly, slowing down this growth in order to avoid it from bursting in dramatic fashion. Though the main objective of the Monetary Policy Committee’s (MPC) decision, announced last November, was to maintain price stability in the UK. In this case, the BoE essentially used interest rates as its tool to control inflation at a target rate of 2%.

Unfortunately, this perception did not hold after the inflation rate – a few weeks following the announcement – breached the target to climb to a peak (since March 2012) of 3.1%. These inflationary pressures were predominantly driven by a fall in the value of the pound sterling after the EU referendum in June 2016. The weaker pound resulted in higher costs for imported food, fuel and other goods, that in turn made the economy worse off. This inflation figure will now push Mark Carney to justify the deviation of more than 1% from the targeted inflation rate to the Chancellor of the Exchequer, Philip Hammond. While many joked about this open letter on social media, the UK has to wait until February to find out the reasons that caused this jump in the rate of inflation, and the strategy that will be implemented to bring inflation back to the targeted range.

With Brexit-led uncertainties surrounding the economic position of the UK, lowering the interest rate will help to boost consumption in the economy and keep it strong. However, the recent appreciation of the sterling against the dollar over the past few weeks, which hit above $1.42, boosted optimism and this may lead the BoE to continue its tightening policy.

It should be noted that the pound extended its recent gains after the employment rate was at its highest level. Improving global economic conditions and strong exports, due to the fall in the pound after Brexit, also pioneered Britain’s GDP growth to defy forecasts and to prove its economy to be resilient. If the overall picture remains bright in the upcoming weeks, rate hikes are not far away.

Source: Market Mogul

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British Pound Advances On Dollar, Slips Against the Euro in Thin Holiday Trade

Pound Sterling on front foot in final week of 2017. Economic and political news flow is thin but there’s scope for low volumes to exaggerate moves in FX.

Sterling overcame resistance from a weak US Dollar Wednesday, although a more robust performance against the greenback by the Euro helped push the Pound-to-Euro rate down by a fraction – reversing an earlier gain for the pair.

Price action comes amid a light flow of economic data and low volumes in foreign exchange markets as London, the main centre for currency trading, operates with a skeleton crew throughout much of the current week.

“The UK has returned from the long holiday weekend, though with another one coming up and the Pound in the middle of a bigger range, there doesn’t appear to be much incentive for the market to be wanting to make any big pushes,” says Joel Kruger, an FX strategist at LMAX Exchange.

The Pound was quoted 0.16% higher at 1.3394 against the US Dollar by the London close while the Pound-to-Euro rate was marked 0.20% lower at 1.1255. The Euro-to-Dollar rate was quoted 0.35% higher at 1.1899.

“The market has been consolidating but ultimately looks poised for a continuation of the 2017 uptrend, with a higher low waiting to be confirmed at 1.3027 on a break of the 2017 high at 1.3658, Kruger adds, referring to the Pound-to-Dollar rate.

“This will then open the door for a measured move upside extension back above 1.4000 and towards 1.4200 into 2018,” Kruger adds, referring to the Pound-to-Dollar rate.”

British Pound Advances On Dollar, Slips Against the Euro in Thin Holiday Trade Commercial Finance Network

Above: Pound-to-Euro rate shown at hourly intervals.

2018 Agenda: UK Economy and Brexit

The ebb and flow of economic growth and the stop-start march of Brexit negotiations have been front and centre for the Pound in much of 2017.

Similar will be true for the currency in 2018, with traders looking to see talks on future trade and transition opened once into the New Year, while hoping for another interest rate rise from the Bank of England.

“For the next week and possibly two, we do not expect new Brexit developments as the U.K. Parliament isn’t expected to debate on the issue until mid January,” says Kathy Lien, a managing director of foreign exchange strategy at BK Asset Management.

“There are no major U.K. economic reports scheduled for release until next week at which point the pace of growth and more specifically the PMI reports will be in focus.”

Next week sees January and the New Year get underway with the monthly surveys of purchasing managers across the manufacturing, construction and services industries, which will be among the final inputs to expectations for economic growth in the final quarter and 2017 as a whole.

Talks around a possible “transition deal” will begin in January, with markets hoping to see a quick agreement struck in the first quarter, before discussions move onto future trade ties after the next European Council meeting.

Simultaneously, markets will be positioning for the next round of Bank of England growth and inflation forecasts, due for release in February. These will be key for the market’s evolving expectation of future interest rate decisions.

The Sterling Overnight Index Average (SONIA) rate most recently implied an expectation by the market that the Bank of England will wait until February 2019 before raising UK interest rates again.

However, the UK economy is recovering its lost momentum, wage growth is picking up and inflation of 3.1% is still more than 100 basis points above its target, which could mean there may be scope for the BoE to signal an earlier move is possible once into the New Year.

This would be positive for the Pound, particularly when considering that markets are already braced for three Federal Reserve hikes in 2018 and that the European Central Bank is yet to announce a full exit from its quantitative easing program.

Source: Pound Sterling Live

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Pound Sterling Set for a Steep Fall Vs Euro in 2018 Say Lloyds Banking Group

Brexit and monetary policy on both sides of the English Channel will be key drivers of the Pound and Euro next year.

The Pound-to-Euro rate could be set for a steep fall in 2018, according to strategists at Lloyds Banking Group, who warn of considerable uncertainty that will surround the exchange rate in the year ahead.

Brexit and monetary policy on both sides of the English Channel will be key drivers of the Pound and Euro next year, with acrimony in Brexit negotiations and slow economic growth in the UK being enough to keep the Bank of England on hold. European Central Bankpolicy will be important too.

“Comments from Brexit Secretary David Davis and EU Chief Negotiator Michel Barnier have reinforced the challenges both sides face in coming to a comprehensive agreement,” says Gajan Mahadevan, a quantitative strategist at Lloyds Banking Group.

Fears over the path of Brexit negotiations eased in December when the European Council voted to allow EU negotiators to begin talking about trade and transition. This was after an agreement was struck covering a “divorce bill”, the safeguarding of citizens rights after the UK leaves and the Northern Irish border.

“Davis has suggested that the UK is aiming for a ‘Canada plus plus’ deal, adding that the intention through negotiations is to treat goods and services as ‘inseparable’. However, Barnier has already outlined that there will be no ‘special’ treatment for the UK financial services sector,” Mahadevan adds.

New guidelines for EU negotiators in the second phase of talks have also highlighted scope for more deadlock between the two sides during the months ahead.

Brussels wants the withdrawal commitments to be made legally binding before the UK’s exit in 2019, but to leave the bulk of trade discussions until after March 2019.

Prime Minister Theresa May and David Davis have insisted that “nothing is agreed until everything is agreed” and that the withdrawal commitments cannot be firmed up without a wider agreement.

“Some activity indicators suggest Q4 GDP growth may be slightly softer than Q3, and the health of the UK consumer is being carefully watched. With interest rate markets are not fully ‘pricing in’ a hike until Q1 2019, uncertainty shrouds the Bank rate outlook,” Mahadevan adds

The Bank of England raised interest rates by 25 basis points, to 0.50%, in November but markets are divided over how soon another hike can be expected. Interest rate markets currently suggest it will be 2019 before the BoE moves again.

Any change in this stance will either pressure or boost Sterling as bond yields and interest rate derivatives prices rise or fall in response to new developments.

“We anticipate the next hike in UK Bank rate to be in August 2018. In contrast, we see the European Central Bank (ECB) leaving interest rates unchanged next year, although it is likely to wind down its asset purchase programme,” says Mahadevan.

The European Central Bank is widely expected to wind down its quantitative easing program in 2018, which currently sees it buy €60 billion of European bonds each month in an effort to keep interest rates low and spur economic activity.

This could place upward pressure on the Euro again in 2018 although there are risks to the outlook for the common currency too, notably around the Italian election that is set to take place in the first quarter.

“Balancing all factors, we see GBP/EUR limited to a range, forecasting 1.09 for both end-2018 and end-2019,” says Mahadevan.

The fall to 1.09 in the Pound-to-Euro rate that is pencilled in by Mahadevan’s forecast implies losses of some 3.5% next year, which is broadly similar to the loss seen by the exchange rate in 2017.

“However, given the high degree of uncertainty around key drivers, there are significant risks to our profile in both directions. Unsurprisingly, this is evident in market sentiment – analysts’ forecasts for GBP/EUR range from 1.04 to 1.25, a range of just over 20%,” Mahadevan warns.

The Pound was quoted 0.04% lower at 1.1251 against the Euro during early trading Thursday.

Source: Pound Sterling Live

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British Pound Vs Euro Has Strategists Divided As The Bank of England Looms

November’s interest rate decision is fast approaching and, with recent data having shown the UK economy at risk of a slowdown, strategists are increasingly divided over what to expect from the Bank of England.

Those hoping for a retreat from earlier warnings over UK interest rates may be left disappointed in the wake of the Bank of England’s November monetary policy announcement.

A solid majority expect the Bank of England to hike rates in November while less than half of strategists expect it to follow through with further policy action in the months after.

“There is an argument doing the rounds that the UK is raising rates so that they can cut them when the ‘inevitable’ Brexit-related collapse happens. Maybe,” says Ben Powell CFA, a multi-asset class content salesperson at Swiss bank UBS.

The bulk of those who do not subscribe to the Brexit collapse view have often cited growing concerns over FX-induced inflation as the motivator behind what is, according to them, likely to be limited policy action.

“At 4.5% UK unemployment is at lows not seen in 5 decades. UK asset prices are booming. In 2016 UK household wealth rose by ~GBP900bn to beyond GBP10Tr for the first time. That ~GBP900bn growth is around 50% of GDP,” says Powell.

But UK economic fundamentals have remained on a sound footing since the Brexit vote in June 2016, despite the prevailing narrative in much of the media and most parts of the financial world.

“UK borrowing has never been cheaper. Outstanding resi mortgages cost 6% 10 years ago and 2.7% now; new lending is at 2.3%. Nearly half of today’s unsecured personal loans cost less than 5%; Sainsbury’s and Tesco’s banking arms are advertising unsecured loans at ~3%, some for up to 10 years in duration,” wrote Jason Napier, an equity research (banks) analyst at UBS.

With the market’s eyes fixed keenly on a deterioration in UK consumer spending that has weighed on economic growth over recent quarters, the “emperor’s well clothed state” has gone unacknowledged by the majority.

“Clearly it’s a matter of judgement, but it may be the case that the Governor thinks supermarkets offering 10 year unsecured loans for ~3% feels a bit punchy. There is also a boom in car financing,” says Powell.

Bank of England governor Mark Carney said in a September speech that UK banks have been extending too much credit to consumers at insufficient rates of interest and that the more “frothy” parts of the market should be addressed.

“This is what the data suggests. And it is what the Governor is telling us he is doing. My sense is that those hoping for a ‘dovish hike’ next week are going to be disappointed,” says Powell.

Pound to Be Left High and Dry Says JPMorgan

The Pound Sterling is at risk of being left high and dry against the Euro and other G10 counterparts over the coming weeks as the interest rate tide that buoyed it through September recedes further.

Bank of England policymakers may not be able to do enough to keep it afloat even if they do vote to hike rates at the November meeting, according to strategists at JPMorgan, who are still betting against the Pound-to-Euro rate.

“Our highest conviction macro trade in recent weeks has been short GBP as we felt that UK rate hikes were overpriced given the weak starting point for UK growth and the existential Brexit shock that continues to dominate the medium-term outlook,” says Daniel Hui, a foreign exchange strategist at JPMorgan.

The foreign exchange team at the US bank say the UK economic backdrop made it difficult enough as it was, in September, to justify embarking on an interest rate hiking cycle but observe that the economy has shown signs of slowing further since then.

“BoE expectations have come under pressure this from a combination of lacklustre growth data releases (annual growth in retails sales is now close to 1% compared to +4% when the BoE eased policy last year) together with a stream of commentary from MPC members that reveals a greater range of opinion about the timing of any monetary tightening,” says Hui, in a note written Friday.

The Pound was buoyed in September when the Bank of England said it begin withdrawing stimulus (hiking rates) over the coming months if inflation strayed further north of its 2% target and the economy remained on a steady footing.

By the end of that month the British currency had posted the strongest performance of all those in the G10 basket as traders rushed to price in a Bank of England hike in November and further action to come in 2018.

“The rate market has belatedly begun to rethink its scenario of a relatively normal rate hike as a result of more equivocal commentary from the BoE and the absence of lift in the growth numbers,” says Hui. “Next week’s 3Q GDP print is expected to confirm the UK as the clear growth laggard within G10, and so maintain the sense of drift in rate expectations and GBP.”

The BoE is expected to raise the bank rate by 25 basis points on November 02 but the number of voices questioning whether this is the right thing to do has grown in recent weeks.

“But it’s important to recognize that a less assertive BoE outlook is not the only factor weighing on GBP, as we interpret GBP’s recent moves as reflecting not only a partial retrenchment of priced hikes, but also the additional leverage of GBP to lack of progress in the Brexit talks and the increased risk of an accidental no deal,” writes Hui.

Hui notes the recent signs of progress in Brexit negotiations but flags that trade and transition talks are unlikely to begin until December at the earliest, the atmosphere around talks may remain uncomfortable for the foreseeable future and risks around sentiment to the Pound will remain high.

The Pound received a boost over the course of Friday and Monday after October’s European Council summit concluded with Brussels sounding a more conciliatory tone on the subject of Brexit negotiations, which revived hopes that “sufficient progress” could soon be made for negotiations to move onto the subjects of trade and transition.

“Our largest net position is long EUR against USD, GBP and CHF. The ECB taper announcement is expected to be marginally constructive for EUR,” says Hui. “But we don’t expect fireworks as the ECB will emphasise dovish forward rate guidance to anchor Bund yields despite what could be a sharp slowdown in the run-rate of asset purchases. EUR upside will be a grind.”

The Pound-to-Euro rate was quoted 0.04% higher against the Euro at 1.1237 during early trading in London Tuesday while Sterling was marked 0.08% higher at 1.3215 against the Dollar.

Source: Pound Sterling Live

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Pound Sterling Strengthens Vs Euro and Dollar As EU Summit Wraps Up On a Positive Note

Friday’s boost to the Pound comes closely on the heels of a sluice of bad news for the UK economy, which has recently seen consumer spending fall and the outlook for consumer credit deteriorate further.

The Pound rose strongly throughout the morning session Friday as October’s European Council summit looked set to conclude on a positive note.

Comments from German Chancellor Angela Merkel, Prime Minister Theresa May and a host of other officials were behind the lift, all of which seemed to suggest Brexit negotiations may soon move forward onto the subjects of trade and transition.

“My impression is that these talks are moving forward step by step,” Merkel told reporters. “From my side there are no indications at all that we won’t succeed.”

Markets have feared a possible delay to the progression of talks on to the subject of trade beyond December.

PM May reiterated her Florence promise that the EU will not suffer a budgetary black hole during the current spending period, as a result of Brexit, which runs into 2020.

“There is still some ways to go on Brexit,” says Theresa May. “I am ambitious and positive about the Brexit negotiations.” She also reiterated that the UK will “honour our commitments.”

Any delay of trade or transition talks beyond December is seen as raising the risk of a so called “hard Brexit”, or a “no deal Brexit”, given the time it is likely to take to agree details of a “transition deal” as well as the future relationship.

The PM’s statements on Brexit came closely on the heels of public sector net borrowing data that showed UK government borrowing rising to £5.3 billion in September, up from £5.1 billion the previous month.

Despite a rise in the headline measure, the latest borrowing figure was the lowest of any September month for a decade.

The Pound-to-Euro rate had risen 0.43% to 1.1145 a short time ahead of noon while the Pound-to-Dollar rate added 0.08% to 1.3159, making Sterling the best performer against the greenback out of the G10 basket.

Pound Sterling Strengthens Vs Euro and Dollar As EU Summit Wraps Up On a Positive Note Commercial Finance Network

Consumer and Credit Outlook Clouds Further

On Thursday, Office for National Statistics data showed retail sales falling sharply by -0.8% in September, much further than the -0.1% decline pencilled in by forecasters.

Despite this, economists still see consumer spending as having stabilised during the third quarter and are also predicting a steady performance from the economy during the period.

However, with inflation pressures already dampening spending, the outlook for consumers and credit supply to households appeared to darken further on Thursday.

“UK household debt levels are high and still growing,” says Annabel Schaafsma, head of Moody‘s EMEA consumer surveillance team. “As real income declines, UK consumers are vulnerable to an economic downturn and any increases in inflation or interest rates could cause problems for household finances, especially for those on lower incomes.”

Moody’s, the ratings agency, said the faltering outlook for the UK consumer will have an impact on credit providers who support their business using the securitisation market.

“Additionally, consumer credit has been growing in excess of the rate of household income. This suggests we will see a weakening future performance of some UK consumer securitisation deals,” says Schaafsma.

Securitisations are an important source of liquidity for banks of all sizes and also for some corporates. Even mobile phone contracts can be securitized and sold on to investors, unlocking capital and providing an instant return for originators.

However, investor demand for UK securitization deals looks set to weaken, particularly in the mortgage market.

“Moody’s expects higher delinquencies in newer, non-conforming RMBS, as opposed to older, more seasoned deals. The borrowers in newer deals are more likely to be paying higher interest rates and have a smaller safety net. Buy-to-let RMBS is very sensitive to a weaker economy and occupancy rates and rents are expected to decline,” the ratings agency says in a statement.

Bank of England Credit Survey Points To Tighter Supply 

Thursday’s Moody’s report came barely a week after Bank of England data showed default rates on credit cards and other types of unsecured loans rose during the third quarter.

Recent BoE changes to bank capital requirements for different types of consumer loans had been expected to slow the pace of lending to households during the months ahead.

But a rise in default rates over the third quarter looks as if it might accelerate the pace at which banks now cut back lending to consumers.

“Default rates on credit card lending were reported to have increased slightly in Q3, while those on other unsecured lending increased significantly,” the Bank of England says, in its latest quarterly Credit Conditions survey. “Lenders reported that the availability of unsecured credit to households decreased in Q3 and expected a significant decrease in Q4.”

Source: Pound Sterling Live