The pound has gained against its major counterparts on the interbank market this week, including hitting a 39-month high versus the euro, a 19-month high against the US dollar, and a near 42-month high versus the Australian dollar.
In part, this is because Prime Minister (PM) Boris Johnson’s Conservative Party has won a clear majority at the UK’s general election. As a result, it’s thought that PM Johnson will ratify the UK’s Brexit deal in the coming weeks, perhaps before Christmas, and get on with negotiating the UK’s future trade deal with the EU.
This has strengthened the pound, because the financial markets generally wish for Brexit to be finalised, with an agreement.
The Conservative Party has won 364 seats, a gain of 66 from the 2017 election, while the opposition Labour has lost 42 seats, to 203. There is one constituencies yet to declare.
Acknowledging his win, PM Johnson said this morning that: “This one-nation Conservative government has been given a powerful new mandate to get Brexit done.”
Notably, PM Johnson’s majority is large enough that he can govern without depending on small groups of MPs, like the European Research Group or Northern Ireland’s Democratic Unionist Party.
It’s thought that this will contribute to a stable UK government next year, thereby benefiting the pound. Meanwhile, Labour leader Jeremy Corbyn has announced that he’ll resign, while Liberal Democrat leader Jo Swinson has lost her East Dunbartonshire constituency.
Turning to the future, sterling has risen, partly because it now looks virtually certain that the UK will avoid a “No Deal” Brexit. After all, prior to the election campaign, all of PM Johnson’s Conservative candidates promised to back the deal he’s negotiated with Brussels.
However, in 2020, sterling could be influenced, because the UK has just a year to negotiate its future trade deal with the EU. Traditionally, such trade deals take around six or seven years to sign.
This raises the prospect of the UK repeatedly extending its deadline, as we’ve seen with Brexit, or defaulting to trading with the EU on World Trade Organisation (WTO) terms. These developments may affect the pound in the foreseeable future.
Turning to the UK economy, it’s been a downbeat week. The economy contracted by 0.1% in October, below forecasts for a 0.1% rise, while UK industrial production declined by 1.3% in October year-on-year. These bode ill for UK Gross Domestic Product (GDP) growth in Q4 2019, from October to December.
Meanwhile, next week will be packed, with the UK’s “flash” services sector data for this month, unemployment statistics for October, inflation for November, and the Bank of England’s interest rate decision. All these releases may affect sterling, alongside PM Johnson’s new government’s Brexit developments.
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