Last week was a good one for the Pound as it advanced against the majority of major currencies as positive data and progress in Brexit talks strengthened Sterling. This report looks ahead to what could affect Sterling exchange rates this week. The table here displays market movements for a number of GBP currency pairs on Friday of last week:
|Currency Pair||% Change||Difference on £200,000|
The news that a transitional deal is nearly finalised was a main catalyst along with positive UK data releases further justifying a rate hike from the Bank of England (BOE).
Theresa May had to make some concessions in order to make progress in talks. She has agreed to the back stop plan of Northern Ireland remaining under EU law to avoid a hard border with the Republic of Ireland.
The big news was that Britain will retain the benefits of the single market and customs union for the two years the UK wanted. This was taken well by investors and caused Sterling to rally.
News from the EU summit is that EU leaders have approved guidelines for negotiations of future relations with Britain following Brexit.
The documents on trade, security and other issues was agreed almost instantaneously which is definitely a good sign considering previous negotiations were troublesome. The UK would like a deal in place by the end of the year.
Theresa May stated she thinks there is a new spirit of co-operation and unity.
Chief negotiator from Brussels, Michel Barnier has been given the mandate to talk directly to the UK about the future relationship between the EU and the UK with the view to get a deal in place by October.
There was also a significant boost for Sterling following an increase in average wage growth and fall in inflation. With the two now close to parity it is a very good sign to a healthy economy.
We also witnessed a significant increase in retail sales, the previous months figure was – 0.2% and the consensus was that there would be a rise to 0.4%. Figures landed at an impressive 0.8%.
A rate hike was already factored in to the exchange for May from the BOE, but the recent positive data provides further justification for the hike.
It was enough for GBP/EUR to break the GBP/EUR resistance point of 1.15, although it was only for a fleeting visit.
Although this is all good news, to me it is in fact quite worrying. I have been telling my clients for months that 1.15 is a resistance point and we have seen GBP/EUR quickly retract whenever it is breached, but if ever there was a reason for 1.15 to be breached and to indeed stay above 1.15 I thought it would be on the agreement of a transitional deal. When this is also combined with the strong possibility of a rate hike I am surprised we are not witnessing new buoyancy levels on GBP/EUR.
The main point of contention in Brexit talks is whether the UK Financial sector will have access to the single market post-Brexit. The problem you have is that France have a thinly veiled ploy to attract London based financial companies to Paris.
The Financial sector is the UK’s biggest form of tax revenue and the French would welcome this income. Negotiations will no doubt be problematic, but if Britain is granted single market following Brexit access expect substantial gains for the Pound.
On Thursday we see the release of Gross Domestic Product data from the UK. It is a measure of all goods and services produced in Great Britain. It can influence the markets and judging by recent retail sales figures I think we could see an improvement which could cause Sterling strength.
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