Sterling exchange rates have been climbing slowly throughout the week although the pound to euro exchange rate is yet to test the 1.12 level. Pound to US dollar rates have also seen a resurgence and is now back above the 1.32 handle after a very impressive run with GBPUSD climbing almost 8% over the last 3-months.
A factor aiding sterling rates is the UK’s economic data which continues to show green shoots in the manufacturing and services sectors. Tim Moore, economics director at IHS Markit said that, “the data for August showed that the UK’s recovery had gained speed in these sectors and that the “eat out to help out” incentive had supported growth seen in August.
Brexit continues to be a main driver behind the strength on the pound however we still seem to be making very little progress in agreeing a deal. This week we saw the resignation of EU Trade Commissioner Phil Hogan just months before the end of Brexit Transition period. The Union is now left with the challenge of filling the vital role along with an Irish commission seat at this pivotal time for its future relationship with the UK. The Irish boarder has been one of the EU major priorities in Brexit negotiations to date.
Germany have also scrapped plans to discuss Brexit next week at a high-level diplomatic meeting due to the fact Angel Merkel believes there has been no “tangible progress” in Brexit talks. EU Officials believe that the UK government may be prepared to risk a no-deal Brexit when the transition period comes to an end on 31st December. The EU believe that the UK will try to pin the blame on Brussels if the UK fails to secure a deal. Brexit was due to be on the agenda next week with EU ambassadors, but now it has been removed from the agenda leaving less time for the UK and EU to negotiate a trade deal.
This decision could be vital as Angela Merkel has been deemed to be a potential dealmaker when Brexit talks reach a crucial stage this Autumn. Last week Merkel met with Frances Emmanuel Macron to discuss the EU’s future post Brexit after several rounds of inconclusive negotiations. Both France and Germany have issued matching statements calling for the UK government to be more open and offer more concrete answers before they can move forward. It seems every day that passes without any concrete progress is another day closer to potentially leaving the EU with a no deal Brexit. This could weigh heavily upon sterling over the next couple of months and we could see more market volatility.
Despite initially some signs of a pickup in activity in the wider EU economy, the recovery is now coming into question. PMI data for the EU covering all sectors including services and construction fell to 51.6 in August down from 54.9 in July. The number remains above 50 which indicates expansion but the recent data has proved disappointing and resulted in some euro weakness after its release. France saw a sharp fall in its numbers whilst Germany saw an unexpected fall in the services sector. Christopher Weil from Commerzbank said that the data indicated “there will be no V-shaped recession. Recent restrictions in response to rising infection rates are further delaying the recovery. We do not expect real GDP to return to pre-crisis levels until 2022.” Any improvement in the outlook after next week’s data could prove beneficial for euro exchange rates with volatility for the GBP to EUR pair.
It has been reported that Germany has extended its furlough scheme until the end of 2021. German Chancellor Angela Merkel has generally been commended on her handling of the coronavirus so the controversial move will be watched with interest. The British government has made clear that the furlough scheme cannot continue indefinitely in the UK due to the sheer cost of it but the decision from Germany does show a divergence from other economies which may have further economic implications.
The USD rallied against both the euro and pound yesterday after Federal Reserve Chairman Jerome Powell announced the central bank had agreed a set of new policies that the US hope will help to support the economy and ease the pressure on unemployment levels.
Powell addressed what is known as the Jackson Hole Symposium stating that the US will now target a 2% average rate of inflation. This shows that the US are in no hurry to increase their interest rates and have given themselves significantly more room to remain on zero interest rates and control their swollen balance sheet over the next few years while the US economy slowly recovers form the shock of Covid-19.
Jerome Powell Stated the Fed will remain accommodative to control unemployment levels even if inflation rises above the target providing medium-term expectations remain anchored. Jerome did however highlight inflation rates would be monitored and will not be left to spiral out of control if excessive inflation pressures do build the Federal Reserve will not hesitate to act.
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