This Pound Sterling update examines factors that could affect GBP exchange rates this week. The table here displays the change in the last 30 days for a number of GBP currency pairs and the difference between the high and low when exchanging £200,000:
|Currency Pair||% Change||Difference on £200,000|
On a daily basis the media are releasing headline news surrounding Brexit as we are coming to crunch time and decisions need to be made. Presently, the UK and EU are negotiating the transitional deal. This is the time the UK will remain part of the EU once the UK departs in March 2019.
The major points from these negotiations so far is that the EU want the UK to remain part of the EU until December 2020, but the UK will have no influence on any new laws or decisions in that timeframe which I don’t think is a major problem for the United Kingdom. However, the EU have also exclaimed that the UK will have to continue with the free movement of people and if new laws are made the UK will have to abide to those laws which appears to be the sticking point of the negotiations.
Both the UK and the EU have announced that they are hopeful that the transition negotiations will be concluded by March, so the important trade talks can begin.
If the UK agree to the free movement of people and the EU agree that if new laws are made in the transition period the UK does not have to abide by them, then I expect the trade talks to begin which should have a positive impact on Sterling exchange rates. Furthermore, I also expect the conformation of a transitional deal will have an impact on future monetary policy by the Bank of England.
In recent weeks UK economic data has impressed which has given Sterling a boost against most of the G10 currencies. The growth (GDP) numbers for quarter 4 of 2017 exceeded expectation to 0.5% from 0.4%, public sector net borrowing dropped to £1.0bn in December a figure a lot lower than expected and the important wage growth numbers which have been a worry for the Bank of England increased to 2.4% from 2.3%.
In recent months the Bank of England have expressed concern about wage growth being outpaced by inflation, and now that this figure has improved and the central bank are forecasting for inflation to drop throughout the year, bets have increased on when the Bank of England will raise interest rates next.
The futures market now has a May rate hike at 50% and a November hike at 80%. My personal opinion is that economic data is now starting to support a hike to 0.75%, however the UK must agree on the transitional deal before the Bank of England hike.
All eyes turn to next week’s interest rates decision for any forward guidance and I expect the governor will reflect on the recent positive data releases and the transitional period. Personally, I believe the transitional deal will be confirmed by March, which will give a boost for the Pound however interest rates won’t be hiked until after the summer. Nevertheless another period of Sterling strength could be on the horizon and foreign currency sellers should look at making arrangements sooner rather than later.
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