Over the last 48 hours the ongoing Brexit negotiations appear to be grinding to a halt as EU leaders have made it clear that the deal Boris Johnson has presented will not be approved by Europe.
The sticking point which hasn’t changed over the last 12 months is the Irish Backstop and Mr Johnson has until Friday to come up with a new alternative which looks extremely unlikely. So far this week the pound has found itself on the backfoot as the uncertainty of crashing out of the EU without a deal has increased.
Next week the Queen will deliver her speech on Monday, however the Times have suggested that this could be cancelled. Later next week, EU leaders will meet for the EU summit. By this point we should already know the status of the Brexit deal. The UK may need to seek an extension or Boris could have managed to get a deal over the line. If a deal hasn’t been reached an emergency sitting in the House of Commons will take place on Saturday 19th. Reports are suggesting that all options will be debated, but it’s likely the ‘Benn Act’ will come into play and the Mr Johnson will have to seek an extension with the EU, something he has always said he wouldn’t do.
Unless a breakthrough materialises in the next 48 hours, the ‘Benn Act’ could be forced onto the Prime Minister. If an extension is approved by the EU, all parties within Parliament may agree to a general election either in November or early December. For clients buying or selling the pound in the upcoming months, the next 3 weeks could shape the future exchange rates for months to come, you may wish to contact your account manager here at FCD.
With German Chancellor Angela Merkel earlier in the week announcing that a deal with the UK is extremely unlikely, the euro has strengthened against the pound. For the remainder of the week the ongoing Brexit saga is likely to be the main driver for the currency pair, however the minutes by the European central bank on Thursday and Mario Draghi speech on Friday has the potential to impact the euros value. For more information on the data releases feel free to contact the trading floor.
This week Fed Chair Jerome Powell hinted that another interest rate cut could come at the next interest rate decision on the 30th and the minutes last night supported Jerome Powell view. The minutes suggested that global growth has slowed, trade wars remain a concern and Brexit pose a risk to the global outlook. For clients that are converting US dollars short term, history tells us when a central bank cuts interest rates there is a good chance that currency will weaken.
The Australian dollar fell to a 10 year low against the Australian dollar at the beginning of the month when interest rates were cut to record lows of 0.75% and Governor Philip Lowe stated interest rates are likely to stay at similar levels for an extended period in a bid to achieve full employment and to restore inflation back to the RBA’s target rate. In addition, the RBA have hinted that they could use Q.E in the upcoming months in a bid to stimulate the economy. If a central bank essentially prints money this tends to devalue the currency. If Q.E is implemented you would expect the Australian dollar to devalue further, good news for clients buying Australian dollars.
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