The strength of pound has been mixed versus its major currency counterparts this week, due to a busy week for political events in the UK and internationally too. For example, events worldwide include the USA’s and Iran’s military skirmish, while bush fires continue to consume millions of acres in Australia.

Looking at Great Britain, sterling has been affected as the UK’s vast services industry has shown signs of resilience. Also, in a meeting between Prime Minister Boris Johnson and new European Commission (EC) President Ursula von der Leyen this week, President der Leyen signalled a compromise approach to the UK/EU future trade talks.

The incumbent Bank of England (BoE) Governor Mark Carney delivered a downbeat speech this week. Mr. Carney noted that the BoE’s forecast recovery in UK economic growth isn’t “assured”, and so the Central Bank is considering cutting UK interest rates below their current 0.5%. This was weighed down sterling somewhat.

When Will a Brexit Deal Be Agreed and How Will the Pound React?

UK services sector stagnates in December, instead of shrinking

According to watchdog IHS Markit’s monthly Purchasing Managers’ Index (PMI), UK services reached 50.0, exactly the figure that separates economic growth from contraction, and above the previous “flash” estimate of 49.0. So this tells us that UK services held their ground last month, rather than contracting.

In part, it’s thought that the performance improved in December, following the Conservatives’ electoral win. If this trend continues in 2020, it could impact sterling’s value.

EU’s der Leyen signals compromise approach to UK/EU trade talks

Sterling’s value was also influenced by the UK PM's and EC President's first meeting at Downing Street this week. In particular, President der Leyen said that elements of the trade deal can be prioritised, to meet PM Johnson’s deadline of finalising the trade talks by the end of 2020.

For the financial markets, this signals that the EU may take a consensual approach to the trade talks, which helps remove the risk of a new Brexit cliff edge which would occur if the UK and EU can’t make an agreement by the end of this year. In turn, President der Leyen’s comments have supported the pound in part.

The actual UK/EU trade talks won’t begin in earnest until March, according to reports. This is because the EU’s 27 member states must first agree a mandate to give to their Chief Brexit Negotiator, Michel Barnier. It’s thought that this will take several weeks, at which point the negotiations will begin properly.

Next week is packed with UK economic data. It’s forecast that UK Gross Domestic Product (GDP) was flat at 0.0% in November, while retail sales fell by 0.6% that month. New data above or below these results could affect sterling.

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