Losses for the pound were significant against most currencies last week. Against the euro it hit lows of 1.0767 on the interbank exchange after its worst week since March (approx. 4.5% drop from highs the week previous) and against the USD 1.2766 (approx. 3.2% drop from highs the previous week). Goldman Sachs have stated that if a deal is reached, they will target 1.15 for the pound to euro exchange rate and have set a target of 1.00 (parity) for a disorderly “no deal” Brexit.
One of the main reasons for this drop in value is the trade deal negotiations and Brexit talks. The UK government published draft legislation on Wednesday in the form of the Internal Withdrawal Bill, which is a mechanism through which it could “clarify, override or disapply terms of the withdrawal Agreement” to the shock of the EU. Britain has stated that it intends to break international law by breaching parts of the withdrawal agreement treaty it signed in January. The EU are demanding that Britain scrap their plans by the end of September, however Britain to date have refused. The EU are now increasing planning for a no-deal Brexit and looking into legal action if talks between the two do not progress and provide reassurances. Many Conservatives have shown concern over the move and fear Britain’s reputation would be damaged. Investment banks have increased their predication of a messy Brexit as the pound loses ground against most currencies on the market. If you are considering a currency exchange involving the pound, touch base with your account manager today for more information.
In brighter news… Britain has secured its first major post Brexit trade deal last Friday with Japan, which has been hailed as “historic”. British trade minister Liz Truss said “The agreement we have negotiated – in record time and in challenging circumstances – goes far beyond the existing EU deal, as it secures new wins for British businesses in our great manufacturing, food and drink, and tech industries”.
It is believed that 99% of our exports to Japan will be tariff-free which could increase trade by 15.2 bn.
After shrinking a record 20% in the second quarter of 2020, the UK economy has expanded 6.6% in July. Thomas Pugh, an economist with Capital Economics said, “July was probably the last of the big step-ups in activity and a full recovery probably won’t be achieved until early 2022”.
Thomas went on to say, “Unemployment is expected to rise sharply because Sunak has ruled out extending his job retention scheme which is due to expire at the end of October. If unemployment rises, this could have a negative effect on the pounds value.”
The Bank of England is likely to signal this Thursday that stimulus will be pumped into the economy with the expected jump in unemployment and mounting Brexit tensions.
Today, we have the Inflation Report Hearing and the UK Parliamentary Vote on Brexit. The UK parliament will debate the Internal Market Bill and its validity. This is step 2 in the process of getting the bill through government as seen in the picture below. Michael Gove has defended the controversial bill saying, “the internal bill was necessary to protect the territorial integrity of the UK” also insisting the government is acting “within the rule of law”. The government are worried that the EU will separate Northern Ireland from the UK causing a blockage in the Irish sea.
According to Reuters, the number of COVID-19 infections in England have jumped by 60% in the first week of Sept. This equates to 3,200 new cases per day from 2,000 a week previous. As of today, the government have banned groups of more than 6 people to try and holt the spread. If the infection rate continues to climb, the UK could be in danger of a second lockdown, in which the economic impact could be significant and therefore the markets could reflect this with the value of the pound. For more information, contact your account manager.
The European Central Bank (ECB) last week failed to push back on the strong euro. Christine Lagarde said the Governing Council does not target the exchange rate although the gains have been “extensively discussed”. This indicates to the markets that the ECB are comfortable to let the currency move higher before taking action, further bolstering the euro.
The Eurozone has seen an under-performing manufacturing sector, however the services sector is showing signs of improving – services PMI read at 52.3 in Feb whereas Manufacturing PMI read at 49.2 (a six year low). A reading over 50 shows signs of an expanding sector while a reading under 50 shows a contraction of that sector. With German manufacturing a main driver of growth in Europe, it is no surprise this has affected the eurozone growth prospects.
Covid Update… France has reported a record daily increase in coronavirus cases leaping past 10,000 a day! Officials have designated 42 regions as “red zones” where the virus has been particularly active. Elsewhere in the EU, the Czech Republic recorded a daily record rise for the third day in a row and Spain recorded its highest ever daily increase last Thursday sparking fears of a second lockdown and economic turmoil.
The US budget deficit has hit over $3tn on the back of coronavirus relief spending. This figure is almost double that of 2019 and the head of the US central bank Jerome Powell told congress that America’s spending path was “unsustainable”. US economy shrank more than 30% between the April-June period, its worst on record (last 70 years of record keeping).
Official figures show unemployment benefits have climbed back above one million last week. This is mainly due to the coronavirus spreading across the US, prompting local authorities to restrict businesses. The jobs market is a reflection of the upheavals facing the world’s largest economy.
On the flip side, the S&P 500 hit record highs last week and retail sales have rebounded, also home building is strong.
The US and China trade talks (remember these?) that last took place in January are due to resume early this week. Tensions over the last six months have been high due to Trump condemning Chinese apps TikTok and WeChat over security reasons. Other recent issues include the origin of the coronavirus, China’s new national security law for Hong Kong and communications firm Huawei. The trade talks between these two economic powerhouses’ effects not only their currency but has a knock-on effect to many other currencies. To keep on top of all potential issues affecting your currency transfer, you may wish to keep in touch with your account manager.
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