The pound continued its rally during yesterday’s trading rising more than 0.3 percent against the euro and 0.2 percent against the US dollar although the pound’s gains have been largely due to a weakening US dollar rather than UK domestic issues. Pound to euro is now trading nearly 1 percent higher and pound to dollar nearly 2.5 percent higher than this time last month.
The US Federal Reserve’s commitment to continue to support the US economy has boosted market confidence and aided global stock markets, which in turn has benefitted the pound. Additionally, better than expected UK economic data has supported the UK currency and the Bank of England’s view that the UK could be looking at a v-shaped recovery. The bank has also confirmed that further quantitative easing would be its preferred option of monetary stimulus, should the economy require further support, which has reduced the possibility of zero or negative interest rates.
However, whilst the pound is riding at a 10-week high against the euro and 9-month high against the US dollar, the pound’s future is far from certain. Recent proposals by the Treasury if adopted by the government could see the UK impose significant tax hikes, which would likely damage consumer confidence and dampen the economic recovery for years to come. As we’ve seen before, increasing tax rates does not necessarily constitute more tax revenue. With historically low interest rates and economic recovery being the primary focus in the current crisis, the government should be looking at ways to support businesses, otherwise increased taxes will likely only bankrupt more firms and leave more unemployed.
The fiscal support provided by Chancellor Rishi Sunak has been paramount in preventing a worse crash in GDP and the UK will need to look at how to deal with this debt, now in excess of £2 trillion, but focus for the foreseeable future should be on returning businesses to some sense of normality. Nevertheless, the scale of this debt is concerning and could impact support for the pound in the coming months. The IMF recently predicted that the UK’s coronavirus rescue fund could cost £65 billion, 3.1 percent of national income although the UK’s Office for Budget Responsibility estimates £120 billion or 5.9 percent of national income.
Brexit headlines have been subdued although formal talks will restart next week, and the UK is expected to put forward its proposal on state aid. It is understood that the EU is looking for the UK to move on fisheries before discussing any other aspects of trade. Fisheries is of course an area where the UK holds an advantage and if the EU can gain a concession here, it puts the EU in a strong position for other aspects of the negotiations. Although, it is unlikely UK Chief Brexit Negotiator will give up ground.
In fact, Frost recently stated that if the EU refused to budge on its demands for continued access to UK fishing waters and for the UK to adhere to the EU’s level playing field demand, he would recommend the UK walk away without a deal. It has also been reported by the Sunday Times that prime minister Boris Johnson has told Frost to end the talks if the EU does not alter its position. Nonetheless, support for the pound has not diminished for now and to date, markets have been optimistic that the UK-EU can reach agreement, but if the status of negotiations turns to no deal by accident or general lack of political will, the pound could find itself under heavy selling pressure.
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