- EU looks to offer concessions on fisheries
- Haldane says negative interest rates not remotely close
- Johnson confirms UK economy to open further in June
- Broader market rally aids GBP
Above: File image of Bank of England Chief Economist Andy Haldane. Image courtesy of the Bank of England, accessed Flickr. Reproduced under CC conditions
- GBP/EUR spot: 1.1245 | GBP/USD spot: 1.2327
- GBP/EUR bank rates: 1.0950 | GBP/USD bank rates: 1.2080
- GBP/EUR specialist rates: 1.1144 | GBP/USD specialist rates: 1.2216
- Find out more about the above
The British Pound advanced by over a percent against the U.S. Dollar and half a percent against the Euro as markets welcomed a bevvy of developments including rumours of progress on fishing in deadlocked EU-UK trade negotiations and a senior Bank of England policy maker quelled expectations for negative interest rates.
In fact we can count four fundamental developments that suggest the near-term outlook for the under-pressure Pound has improved: 1) EU-UK trade talk rumours on fishing 2) suggestions the Bank of England is in fact not close to slashing rates below zero 3) signs that the UK economy will largely be reopened in June and 4) a broad-based stock market rally.
How long these factors can remain relevant for Sterling should determine whether the recent gains can extend.
"The Pound has found support this week, although it was a little lower overnight. It remains above $1.23 and €1.12. Further announcements to lift UK lockdown restrictions may have contributed to sterling’s recent recovery moves, but there is potential for volatility ahead as the end-June Brexit transition period deadline approaches and with Bank of England policymakers not ruling out a possible move in interest rates below zero," says Hann-Ju Ho, Economist at Lloyds Bank.
1) The Pound rose after Reuters reported the EU is willing to shift its stance on fisheries in negotiations with Britain next week, sources said, in what would be the first major concession from the bloc in talks on their new relationship after Brexit.
The EU has thus far in negotiations sought to maintain the status quo regarding fishing - which includes full access to UK waters by EU nations - something the UK has resisted, arguing full access to UK waters should only be expected of members of the EU.
But, an EU official told Reuters this stance was potentially only a starting point for negotiations.
“There have been hints of a possible reconciliation,” the official said
"We would be looking to shift on demands to keep everything as is now, a somewhat maximalist opening position, if the UK also moved from its position of coastal attachment. That’s where the room for compromise lies," added the official, ahead of another round of EU-UK talks next week.
Fisheries has been a major stumbling blocs in negotiations, particularly for countries with sizeable fishing fleets that rely on access to British waters, such as France.
"For Brussels this is a small step away from pure ideology. But the issues concerning its 'level playing field' demands and ECJ jurisdiction are much bigger roadblocks," says Stephen Gallo, European Head of FX Strategy at BMO Capital.
The Pound-to-Euro exchange rate rallied to a high of 1.1259, having been as low as 1.1184 while the Pound-to-Dollar exchange rate rallied to a high of 1.2362, having been as low as 1.2182 earlier in the day.
If we consider the Pound's performance over the course of the past month it becomes clear the currency is underperforming its G10 peers with a loss of 0.65% against the Dollar and 2.0% against the Euro being registered.
Above: GBP performance against its peers over the course of the past month
The reason for this relative underperformance largely rests with growing anxieties over the course of Brexit trade negotiations between the EU and UK, which are for all intents and purposes currently deadlocked.
"I cant see this GBP upside as sustainable as long as there is zero progress on Brexit," says Vasileios Gkionakis, Global Head of FX Strategy at Lombard Odier & Co Ltd.
Following the last round of trade negotiation talks, the UK's chief negotiator David Frost said the EU were making "novel and unbalanced proposals on the so-called level playing field," adding that the list of demands were without precedent in previous EU trade deals. This combined with the EU Chief Negotiator's dour assessment on the state of negotiations have lead markets to raise expectations for a potential failure in talks.
However, news of potential progress over fishing would offer markets the opportunity to buy back some their earlier pessimism, sending Sterling higher as a result.
2) Bank of England chief economist Haldane moved to cool speculation over negative interest rates by saying policymakers are "not remotely close" to cutting rates below zero.
Speaking during a 'Coronavirus Webinar' organised by the Confederation of British Industry, Haldane said policymakers are reviewing the potential impact of negative rates on banks and lenders, which could see a squeeze on margins, and on the broader economy.
Haldane added that policymakers are not close to implementing any such cuts to interest rates; "to be clear, reviewing and doing are different things and currently we are in the review phase and have not reached a view remotely yet on the doing".
The prospect of negative interest rates in the UK had been one factor weighing heavily on Sterling over recent weeks, following comments made by Haldane and some of his colleagues earlier in May that negative interest rates in the UK were a possibility.
But, it seems markets might have to recalibrate this likelihood, and Sterling has gone higher as a result.
Above: Prime Minister Johnson reveals plans to reopen the economy on May 25. Picture by Andrew Parsons / No 10 Downing Street
3) Prime Minister Boris Johnson announced on Monday that some outdoor retailers would be allowed to reopen on June 01, a date that is still scheduled to see many schools reopen. A broader opening of the retail sector by mid-June was also announced, which amounts to a significant step towards fully restarting the economy.
"GBP rallies on the back of USD decline and news on UK economy re-opening," says Gkionakis.
"The ongoing constructive risk climate also bodes well for the Pound Sterling. Adding to the currency’s momentum was the prospect of the economy opening up again by mid-June," adds Mathias Van der Jeugt, analyst at KBC Markets.
Concerning the domestic political intrigue centring on Domininc Cummings - the senior adviser to Prime Minister Boris Johnson - Van der Jeugt says the issue appears to be of little consequence to the currency market. "It is of no significance for the Pound," says the analyst.
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4) The UK currency's performance continues to be a reflection of a number of separate drivers, particularly broader investor sentiment.
Since the covid-19 crisis engulfed financial markets Sterling has shown a positive correlation with risk appetite, rising alongside stock markets and declining when they were in retreat.
Above: GBP/EUR (blue line) and S&P 500 (orange line). The relationship had broken down for much of May, but this week we have seen signs of a potential recoupling.
We have noted this correlation to have been breaking down of late, particularly with Brexit risks reappearing and the emergence of Sterling-negative guidance from the Bank of England that negative interest rates could soon be introduced.
However, the market rally seen over the past 48 hours has simply been large enough to feed through into Sterling advances: the S&P 500 index - a proxy for broader investor sentiment - rose to its highest levels since early March.
Key to Sterling's outlook therefore is how long the positive signals coming from the stock market can continue to drown out concerns that investors have with regards to the currency's future outlook, particularly relating to Brexit.
As long as global stock markets and commodity prices are rising we would imagine Sterling will remain relatively well supported, however any bouts of market setback could see Sterling revert to losses.
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