British Pound Records Rare Weekly Advance Against Euro, Dollar as May Confirms Govt will Pursue Free Trade with EU

Pound Sterling managed to end the week of 17-21 October higher than where it started against both the Dollar and Euro with Prime Minister Theresa May's first European Council summit being cautiously welcomed by wary investors.

• Pound to Euro exchange rate today (22-10-16): 1.1239
• Euro to Pound exchange rate today: 0.8901
• Pound to Dollar exchange rate today: 1.2230

The Pound did well to record a weekly gain against the strengthening US Dollar - the USD was on a bit of a rampage towards the end of the week and ate away at GBP/USD's earlier gains. 

Much of the strength in USD comes courtesy of the under-pressure Euro which really has struggled in the wake of the ECB policy meeting on Thursday the 20th.

However, Sterling can take some of the accolades for its advance as markets are reading a more benign atmosphere concerning the Brexit debate.

The currency was particularly sensitive to heeadlines emerging from the European Council summit which saw Theresa May confirmed to a media briefing that she has told European leaders she will push for free trade in goods and services at upcoming Brexit negotiations.

This is what markets want to hear if they are to buy Sterling.

However, she also said she would seek to ensure Britain attains full sovereignty over its borders:

This is a contradiction to many who note that full access to the EU’s single market requires freedom of movement for EU citizens.

This would suggest that Britain will seek free trade BUT NOT unfettered access to the single market - this sets up some notable uncertainties and would explain why Sterling did not rally.

The lunchtime meeting between May and Jean-Claude Juncker, the president of the European Commission was also navigated without incident.

The Telegraph reported Juncker would criticise May over signals that the Government is pushing for a clean break from Brussels rather than a compromise solution.

It is hard to interpret any currency reaction from what Juncker says; we believe it is the words of May that will matter to markets as they want to see how she is swinging the hard-versus-soft Brexit dial.

On that front, nothing substantive was given but we will  be watching for a more accomodative approach to Brexit over coming days and weeks as this could well prove to be pro-Sterling.

For the UK currency headlines matter as this remains a highly sentiment-driven currency at present with headlines surrounding Brexit, rather than data, being in control:

As can be seen above, the biggest moves in GBP since mid-September have been sparked by news headlines.

This is corroborated statistically with the observation that the correlation with GBP/USD and Citi’s UK Surprise Index has fallen to +0.7%.

The surprise index is a measure of data surprises - i.e how data beats or undershoots expectations.

Typically the scale of the surprise is what drives a currency reaction but in the age of Brexit this correlation appears to have fallen away for Sterling.

“Beyond the macro economic variables PM May is set to attend the latest EU Leaders summit in Brussels. The UK PM is expected to tell EU Leaders  that she wants both a ‘strong Britain’ and a ‘strong EU’ after Brexit. However it does not seem likely that she will set a conciliatory tone,” says Jeremy Stretch at CIBC Markets in London.

“The last couple of weeks have seen GBP depreciate when politicians have spoken, the next two days, PM May has a working lunch with Juncker tomorrow, risk extending that scenario,” adds Stretch.

Latest Pound/Euro Exchange Rates

	Live: 1.1446▲ + 0.03% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1057 - 1.1103
**Independent Specialist	1.1286 - 1.1332 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Hammond Hints at Accomodative Autumn Statement

The most notable domestic development ahead of the weekend is the Chancellor's response to news the UK's budget deficit continue to expand.

Public fianance data showed public sector net borrowing was at £10.12BN in September, markets had forecast a rise of £8.2BN.

The Chancellor has responded:

The Chancellor @PHammondMP comments on the latest @ONS Public Sector Finance data. pic.twitter.com/Hy6LIFZp7v

— HM Treasury (@hmtreasury) October 21, 2016

Many commentators believe Hammond's mid-term budget will be an accomodative one that will attempt to ensure the UK economy is well positioned ahead of any Brexit-inspired downturn.

He could therefore expand Government spending / cut taxes in order to achieve this. Such a move would hurt the public finances but any positive economic effects could support Sterling.

British Pound: The Levels to Watch

The Pound is looking handy against the Euro ahead of the weekend - if current levels can be maintained then Sterling will be on course to record its second successive weekly gain. 

The cross spiked lower to test support at 1.1111/1.1086 during Thursday 21st's ECB press conference.

However, it quickly recovered and has reverted to its interim range.

“We now expect further consolidation,” says Robin Wilkin at Lloyds Bank who says that while it remains above support a stronger corrective recovery remains possible.

The analyst argues a break higher through 1.1236-1.1261 sees little in the way of resistance until the 1.1429-1.1461 region.

The Pound's prospects against the US Dollar - which is strong across the board - is less assured.

"GBPUSD remains trapped in a short term range. Resistance in the 1.2300/30 area has capped rallies on multiple occasions in recent sessions, while support at 1.2200/25 has also held well. With little on the calendar, we expect this consolidation to continue. On a break of the 1.22 level, 1.2150-1.2090 range lows provide further support," says Lloyds' Wilkin.