Two key meetings between the UK and EU reached boiling point on Thursday afternoon as Brexit negotiations appear to hit a brick wall due to the content of the UK’s Internal Withdrawal Bill, which was presented in parliament earlier this week.
These serious concerns escalated throughout talks yesterday and have led the EU to demand that the UK ditch plans to change Johnson’s Brexit deal by the end of the month or risk jeopardising trade talks altogether. The EU points out that the UK has “seriously damaged trust” and that they would not be shy of taking legal action including financial and/or trade sanctions. Michael Gove added that the UK has made it “perfectly clear” it would not withdraw the bill, heightening tensions from previous political posturing to a more definitive course of attack.
UK Chief negotiator David Frost admitted that significant differences remain over a free trade deal as discussions ended yesterday, but that the conversation will continue in Brussels next week. As we head toward the all important date of 15th October for a deal to be reached it remains to be seen which side will fold first, or whether either will stand down and prevent forcing the UK in to ‘no deal’ territory.
This morning’s Gross Domestic Product (GDP) figure confirms a positive 6.6% growth in the UK economy for July, indicating that UK plc continues on the path of recovery. Following on from June’s 8% growth this is welcome news for us all. The UK economy currently sits 12% smaller than it was at the beginning of this year, before the Coronavirus pandemic – having shrunk 22% over lockdown.
The latest data from the Office for National Statistics (ONS) has found that upwards of 49% of employees have resumed working from their place of work, which will be welcome news for the UK government who have recently launched a major media campaign to encourage us to return. The number of people on furlough has also reduced to 10.5% of the UK workforce, which still causes a huge worry for the UK labour market in advance of the furlough scheme coming to a close at the end of next month. It is unclear at this stage whether this decrease has been driven by people returning to work or facing redundancy.
FX markets will be concerned about the possibility of the UK economic outlook getting worse before it gets better, and this will continue to influence the value of the pound.
Adding pressure to Sterling was a surge in strength for the euro following yesterday’s European Central Bank (ECB) meeting. The euro made gains against both the pound and the US dollar after the ECB declined the opportunity to talk its value down. Christine Lagarde in her opening statement addressed concerns around a strong euro highlighting that ‘there is no need to react to euro gains’ and causing a flurry of EUR buying.
Lagarde continued to say that the strength of the economic recovery in the Eurozone remains surrounded by uncertainty, and although domestic demand has recorded a significant recovery there are still ongoing question marks over the rate of both consumer spending and business investment following the economic impact of COVID-19 on the European economy.
Forecasting a GDP figure of -8.0% (prev. -8.7%) for 2020 represented an improved outlook which also filtered through into the euro’s gains.
Further positive news for the single currency was the fact that the ECB decided to leave its €1.35 trillion Pandemic Emergency Purchase Programme unchanged although they have accepted that it is “very likely” to be used in full. At this juncture the ECB feel that they have done enough to dilute the impact of COVID-19 on the European economy although as always will remain poised to act “if and when needed.”
US Jobless Claims for the last week were higher than anticipated at 884,000 initial applications versus a forecasted 846,000 signalling a bumpy recovery amongst the US labour market. With hopes that green shoots had sprouted in the job market with the reduction in claims for unemployment benefits in the preceding two weeks, this signals that there are still ongoing pressures. “The data shows that despite job gains and a fall in the unemployment rate in August, lay-offs remain widespread and the labour market remains in a fragile place at this critical juncture,” said analysts at Oxford Economics. Despite this news, USD continued to claw back recent losses against the pound.
US Politics also strayed into Brexit territory with Nancy Pelosi, Speaker of the US House of Representatives highlighting that there was “absolutely no chance” of a US-UK trade deal if the Northern Ireland peace process is derailed. Pelosi issued a statement earlier this week saying that if " Brexit undermines the Good Friday accord, there will be absolutely no chance of a US-UK trade agreement passing the Congress.” Pelosi's statement will come as a major blow to the UK, as several prominent Brexiteers have claimed that the ability to sign international trade deals will be the most obvious upshot of leaving the European Union, a trade deal with the US being of significance importance given the size of the US economy and the fact that the US is the UK’s largest single trading partner.
Global markets are experiencing significant volatility at present while attempting to negotiate unprecedented times. Both the Pandemic and Politics are at the forefront of everyone’s mind and this uncertainty is being reflected within the foreign exchange market. Please keep in touch with your account manager at Foreign Currency Direct to keep informed of developments or download our latest monthly currency forecast for more information on the factors impacting exchange rates in September.
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