This Sterling report discusses how the Pound reacted to the news that the Brexit transition deal has been agreed. It also looks at the potential impact of the EU Summit and other events for the week ahead. The table below shows the market movements for a number of GBP currency pairings yesterday:
|Currency Pair||% Change||Difference on £200,000|
The Pound has surged against all of the major currencies after it was announced yesterday that an agreement between Britain and the EU has been reached on the terms of a transitional deal. Brexit sectary David Davis and the EU Chief negotiator Michel Barnier confirmed that the legal text for the transition had been agreed. Rates for GBP EUR have broken over 1.14 once again hitting a five week high and creating a good opportunity for clients looking to buy Euros. GBP USD has hit a one month high breaking back over 1.40 for the pair. This is welcome news for the Pound as the British government seeks a formal commitment for a transitional deal which should give businesses some reassurance by effectively keeping Britain operating under EU rules for 21 months after leaving. It ultimately means that Britain should avoid the so called cliff edge Brexit.
Clients looking to buy Euros or Dollars would be wise to consider taking advantage of the higher rates as spikes like these have so far proved very short lived since the beginning of this year.
Any gains for the Pound beyond this are likely to be limited at this time as important information surrounding the future trading relationship beyond transition still needs to be decided. The thorny issues over the Irish border and how a free trade deal which encompasses financial services remain the major stumbling blocks in the negotiations. Until clarity is offered in these areas the Pound is unlikely to make material gains. It is worth highlighting that Michel Barnier has said that formal trade negotiations will not start until after Brexit but the “scoping” out of a deal will take place before.
The EU summit which starts on Thursday could see additional volatility for the Pound as more detail is offered. There has also been a backlash from a range of politicians on the terms on the deal specifically on fisheries and migration and this could prove problematic for the Prime Minister.
UK Consumer Price Index inflation (CPI) data for February is released this morning at 09:30 and could see some market movement for sterling exchange rates ahead of the Bank of England’s interest rate decision on Thursday. Inflation for February is expected to fall to 2.8% down from 3% in January although even at these levels it will be well above the Bank of England’s target of 2%. As things stand the markets are expecting the next interest rate hike to happen in May and further guidance offered from the Bank of England should help see the Pound rally. Any gains though are likely to be limited due to the fact that the markets should have largely priced in the prospect of a May rate hike. A very high inflation number could see the Pound rally if rate setters become tempted to hike this Thursday.
UK unemployment data released tomorrow will be equally as important as it contains the wage growth numbers which is another area the Bank of England are keeping a close eye on. Expectation is for average pay to rise to 2.6% in February up from 2.5% in January. If wages are seen to be rising then this will give the central bank the green light to raise rates and this would be welcome news for the Pound.
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