British Prime Minister Boris Johnson has been making his way round Europe during the course of this week. His meeting with German Chancellor Angela Merkel on Wednesday appeared to go well with the German leader warming to the idea of reopening the negotiations. However, she did claim that the pressure is on the UK to find a ‘workable plan.’
The pound hit its highest level all month vs the euro, reaching a highs of the 1.0551 on the interbank exchange, after the tone from two European leaders softened towards the Brexit situation. French President Emmanuel Macron suggested that a deal could still be done and they will be open to reviewing the Irish backstop arrangement. The French President however, had been a bit more frosty towards the UK recently by claiming ‘Can the cost of a hard Brexit - because Britain will be the main victim – be offset by the United States of America? No.’
German Chancellor Angela Merkel also appeared to be more amenable to the same stance and this means that the chances of a no deal Brexit have also decreased. This was one of the major reasons for sterling’s strength vs a number of different currencies including vs the euro.
Meanwhile, Boris Johnson has been sticking to his guns about rejecting the Irish backstop arrangement if a no deal Brexit is to be avoided. He is clearly playing a rather dangerous game at the moment as this appears to increase the chances of a no deal.
The current plan is still for the UK to leave the European Union by 31st October with a no deal and this could be one of the major reasons for the ongoing pressure on the value of the pound.
According to reports the UK announced a smaller than expected budget surplus last month as government spending increased. The small surplus means that finances for the government are now in a worse position overall for the first few months of this year. Indeed, borrowing has now risen to £16bn which is 60% more than the same period last year.
The surplus for July was due to come out at £2.7bn but it came out at just £1.3bn. The Office for National Statistics has forecast borrowing to be £29bn, so after just four months we have now borrowed over half this amount.
This is likely to put more pressure on Boris Johnson’s spending plans as he has previously suggested that he will increase spending in anticipation of the Brexit.
With the British economy having contracted during the previous quarter things are looking rather uncertain for the British economy and this could start to weigh on sterling exchange rates. The one positive constant for the UK’s economy is that of UK unemployment which is currently sitting at 3.9% and this is close to the lowest point in 44 years.
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