- GBP/EUR overlooks Brexit threats as hope of a deal lingers.
- But possibility of a 'no deal' limits GBP upside in short-term.
- Charts flag strong support, possible bottom in place at 1.0726.
- Stock market correlations imply breakthrough upside to 1.19.
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- GBP/EUR spot rate at time of publication: 1.1041
- Bank transfer rate (indicative guide): 1.0755-1.0832
- FX specialist providers (indicative guide): 1.0870-1.0942
- More information on FX specialist rates here
Pound Sterling starts the new week stronger against the Euro amidst market expectations that ultimately a post-Brexit trade deal will be reached by the EU and UK, despite UK Prime Minister Boris Johnson saying negotiations had effectively ended last week.
The Pound-to-Euro exchange rate was volatile at the end of the previous week after Prime Minister Boris Johnson said that preparations for a trade relationship "more like Australia’s" are to be ramped up, which means the British government is preparing for a life without any form preferential trade agreement with European Union countries.
But crucially; he didn’t rule out further talks, while price action in British exchange rates was suggestive of lingering hope that an agreement may still be reached ahead of the December 31 end to the transition period.
"The scale of the currency decline was relatively muted considering that no risk premium (associated to no deal Brexit) has been priced into the currency for some time. If the market credibly believed in the threat of a no deal Brexit (as expressed today), GBP would be materially weaker today, in our view," says Petr Krpata, chief EMEA strategist for currencies and bonds at ING. "We expect the UK-EU trade negotiations to continue next week, suggesting a limited downside to GBP, with GBP/USD to be primely driven by EUR/USD as EUR/GBP should remain range bound."
Friday media reports citing a Downing Street spokesperson suggested Michel Barnier had been told not to come to London unless willing to "discuss all of the issues regarding a legal text," or all of the practicalities around a ‘no deal’ Brexit. This was after the EU’s statement led Johnson to conclude that "unless there is some fundamental change of approach," it will not be possible to secure a simple free trade deal with the EU.
So while Sterling has stabilised and talks are potentially ongoing, it remains a long way from being from being out of the 'no deal' Brexit woods.
Above: GBP/EUR at daily intervals with Fibonacci retracements of March recovery, S&P500 index futures (blue line, left axis)
Karen Jones, head of technical analysis for currencies, commodities and bonds at Commmerzbank is a buyer of the Euro against the Pound, looking for a decline in GBP/EUR back toward the 78.6% Fibonacci retracement of Sterling's March recovery, located around 1.0742.
This is formidable support for Sterling and likely to be the limit of its downside, Jones says, while resistance is seen barring the path higher around 1.1120.
This indicates continued consolidation for the Pound-to-Euro rate pending a Brexit breakout in one direction or another.
Any eventual announcement that a deal has been reached could potentially see the Pound closing the gap between itself and the S&P 500 on the charts (see above chart). The Euro-to-Dollar rate, AUD/USD and NZD/USD have all followed that index in lockstep for months, but not Sterling, which has been burdened by Brexit and other factors. Closing the gap between it and the S&P 500 could see the Pound-to-Euro rate trading up toward 1.19.
Brexit remains the foremost driver of Sterling, many analysts say, although the British currency will also have to navigate inflation data, flash PMI surveys for October, a speech from Bank of England (BoE) Governor Andrew Bailey and whatever coronavirus-inspired actions the government takes in the week ahead.
These could all, if anything, be downward influences on Sterling.
"We continue to believe that the pound is pricing in only a modest No Deal risk premium. At the same time, the surge in new COVID cases in the UK is increasing downside risks for the GBP by applying more pressure on the government to tighten restrictions. The outlook for the UK economy is darkening heading into year end which could encourage the BoE to deliver more stimulus next month," says Lee Hardman, a currency analyst at MUFG.
London, Essex, Elmrbidge, Barrow-in-Furness, York, North East Derbyshire, Erewash and Chesterfield among others were placed into the high, or level two category, of a new three-tier system of coronavirus related measures last week where mixing between households is further restricted.
Above: Pound-to-Euro rate at weekly intervals with 55-week average (orange).
"The 'Rule of Six', the 10pm curfew for the hospitality sector, and advice that people should work from home if possible—seems to have slowed the growth rate of the virus only modestly,” says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. "Hospital admissions also have risen at a similar rate, showing that it is not just young people, who usually can shake off the virus quickly, who are becoming infected. Daily admissions will reach their April 7 peak in just five weeks time, if the current growth rate is sustained."
Meanwhile, local leaders in Manchester have clashed with London over what they say is inadequate support from HM Treasury after Prime Minister Boris Johnson sought to place the UK’s second largest metropolis and surrounding areas into the highest category of ‘lockdown’ where pubs and some other hospitality venues are closed.
Resistance from Mancunian leaders has drawn threats of direct intervention from Prime Minister Boris Johnson, who claimed he would act to “save lives” without specifying what he could or would do as part of such intervention. Manchester would join Liverpool City and surrounding region under the most cumbersome restrictions if London succeeds in imposing itself on the North.
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The restrictions may mean the economist consensus is radically underestimating the size of the likely falls in October’s flash PMI surveys and that markets may no longer be able to take so lightly the ongoing talk from the Bank of England about the prospect of a shift to negative interest rates.
IHS Markit PMI surveys are set for release at 09:30 Friday, when the all-important services PMI is expected to fall from 56.1 to 53.4, which would still leave it at a level that implies some form of growth in the sector. But before then BoE Governor Bailey will speak at 10:25 on Thursday in an address to the Waterline Summit. Both events could draw increased scrutiny from the market given dual Brexit and coronavirus challenges.
“It probably will not be long before some businesses are forced to close again. GDP would drop by about 1.5%, all else equal, if closures of food and beverage services businesses pushed output in this sector back down to its level in June, when they were able to offer only takeaway or delivery. Alternatively, a two-week "circuit breaker", resulting in the closure of all parts of the economy that reopened in July, likely would reduce GDP by about 4.5%, from its August level, during the weeks that it operated,” Tombs says. “It is looking increasingly likely that economic activity crested in September..”
Above: Overview of UK Government's digital coronavirus dashboard.
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