The pound strengthened somewhat versus major currencies including the euro, US dollar and Australian dollars this week, yet fell towards the week’s end. In part, this is because, following last month’s clear UK general election result, it’s hoped that the UK economy will rebound in 2020.
Looking over the next 12 months, sterling’s value might also be influenced by the UK’s future EU trade deal talks, especially Prime Minister Boris Johnson’s pledge to limit the negotiations to the end of this year.
Elsewhere, we’ll see the impact of incoming Bank of England Governor Andrew Bailey, and his approach to UK monetary policy.
Following last month’s UK election, in which the Conservatives won a majority of 80 MPs, the world’s investors hope that the UK economy will bounce back.
After all, with a large majority, PM Johnson can set a clear economic agenda, which in turn could bring greater predictability to the UK’s outlook. In turn, this could encourage British businesses to hire new staff and invest, thereby potentially fostering the UK’s Gross Domestic Product (GDP) growth this year. According to the latest statistics, UK GDP flatlined at 0.0% in the three months to October, weighed down by Brexit uncertainty. So markets may look for a rebound this year, which could impact sterling.
Elsewhere, PM Johnson will begin the UK’s future trade deal talks with the EU, which will determine the terms on which British firms export and import with Europe. Importantly, the PM is legislating to limit these trade talks to December 31st 2020, when such negotiations usually take six or seven years. PM Johnson has made this pledge to emphasise his commitment to “get Brexit done”.
However, for many on the financial markets, this risks creating a new Brexit cliff-edge, in which the PM either finalises the trade deal by a strict deadline, or the UK defaults to trading with the EU on World Trade Organisation (WTO) terms. This could mean more tariffs and bureaucracy. So the markets will closely watch the trade talks, which may affect the pound too.
Andrew Bailey will take over from Mark Carney to become the new Governor of the Bank of England, on 16th March 2020. Although Mr. Bailey is a veteran Central Banker and currently heads the Financial Conduct Authority (FCA), his views on UK monetary policy are unknown.
So we´ll see if Mr. Bailey intends to move the UK’s interest rates from their current 0.75%, and his other policies, which could impact sterling this year.
Turning to next week, key economic data includes the UK’s revised services sector Purchasing Managers’ Index (PMI) for December, and the British Retail Consortium’s retail sales figures for last month too.
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