Developments regarding Brexit continue to lend Pound Sterling a support hand on global foreign exchange markets.
- The Pound to Euro Exchange Rate Today (14-12-16): 1.1967
- The Euro to Pound Sterling Exchange Rate Today: 0.8355
- The Pound to Dollar Exchange Rate Today: 1.2719
GBP trades towards the upper end of its multi-week rebound as the idea of a transitional Brexit deal that will bridge the country’s move out of the European Union gains traction.
Both the House of Lords and a senior Government member made calls for an interim deal that would see the UK remain a member of the single market until such a time as Brexit has been negotiated.
There is a growing consensus that the two years that follow the triggering of Article 50 are simply not long enough to arrive at credible deal.
Chancellor of the Exchequer Stephen Hammond told lawmakers on the Commons' Treasury Select Committee that a transitional deal was needed in order to help smooth the Brexit process in order to avoid disruption that could risk Britain’s “financial stability”.
“There is, I think, an emerging view among businesses, among regulators, among thoughtful politicians, as well as a universal view among civil servants on both sides of the English channel that having a longer period to manage the adjustment between where we are now as full members of the EU and where we get to in the future as a result of negotiations would be generally helpful,” said Hammond.
The Chancellor has made this call before and we know him to be one of the leading figures in Government fighting against a hard-Brexit.
Theresa May first sparked the idea of a tranitional period in comments made to the CBI's annual conference where she said she would be keen for a deal to be struck that avoided a ‘cliff edge’ scenario for businesses.
Positive for the Pound
The British Pound rose on Hammond's comments with the GBP to EUR exchange rate rising to above 1.19.
GBP is struggling to advance beyond the 1.1980 level it appears owing to the solid selling interest in the run up to 1.20.
Those with impending Euro payments would therefore do well to lock-in some of the gains now while keeping open the option to transact at higher rates should they become available.
The GBP to USD exchange rate trades above 1.26 thanks to a stellar day of gains thanks largely to the US Dollar falling back ahead of a much-anticipated US Federal Reserve meeting mid-week.
For Sterling, any move away from a so-called hard-Brexit is taken as positive as the severity of Brexit remains a key consideration for foreign exchange traders.
"GBP is sensitive to the distinction between hard vs soft Brexit which boils down to the degree of single market access, including transitional trade arrangements. This should become clearer through the year, albeit there is little information to handicap the odds of a more or less disruptive economic outcome," says a note on Sterling's outlook for 2017 from JP Morgan.
Pound Aided by Inflation Data, Trend Still Bullish
It was not just the comments of Hammond and the new report from the House of Lords that aided Sterling.
Stronger-than-forecast UK November inflation figures have helped to keep the Pound bid against most currencies thus far today.
GBP/USD actually turned higher on Tuesday as the dollar took a back seat ahead of the FOMC statement and press conference on Wednesday.
"The GBP/USD continues to reside inside its rising channel, thus the trend is still technically bullish despite last week’s wobble. Last week, the Cable turned lower off of 1.2770 level which means that the long-term resistance in the 1.2800/75 range was left untested. Because of the downward move, there may be lots of buy stops stacking above 1.2770 now. The cluster of buy stops there may act like a magnate to first pull price towards it and then fuel a potentially rally into that 1.2800/75 area, before price turns lower," says analyst Fawad Razaqzada at Forex.com.
Why does Razaqzada keep banging on about 1.2880/75 range?
"Well this area was the last support prior to the breakdown that eventually led to the flash crash. Once support, now it could turn into resistance. In addition, the top of this range is where the 61.8% Fibonacci level comes into play," says the analyst.
The price may never get to the 1.2880/75 area but it is nevertheless where Razaqzada will be anticipating GBP/USD to turn lower from, perhaps immediately after the FOMC statement on Wednesday.
Remember the US Fed deliver their decision at 19:00 GMT, and this could shake the market notably.
For further analysis, please see here.
If price starts to move below short-term supports such as 1.2695 and 1.2660 then we may see a drop towards the more stronger support levels at 1.2620, 1.2580 or even 1.2525 first.
"Ultimately, the short-term trend remains bullish until and unless price breaks below the support trend of the bullish channel. Generally speaking, I think the cable will remain range-bound between 1.25-1.30 as we approach year-end," says Razaqzada.
House of Lords Call for Transitional Brexit Deal
It’s not just the Government’s senior ministers who are open to a transition arrangement with the EU.
The House of Lords EU Internal Market and External Affairs Sub-Committees have on Tuesday December 13 published a report on frameworks for UK-EU trade following June’s referendum.
It concludes there is always an inherent trade-off between liberalising trade and the exercise of sovereignty.
The report, Brexit: the options for trade, recognises that the Government is seeking a bespoke agreement with the EU post Brexit, but concludes that tailoring existing trade models will be difficult.
A Free Trade Agreement (FTA) with the EU would take longer than two years to negotiate.
The Government will need to agree a transitional trade arrangement between the UK leaving the EU and full implementation of new trade terms.
The report concludes that a temporary extension of participation in the customs union would be one important element of this.
The report also urges the Government to establish a clear ‘game plan’ for a transitional arrangement at the outset of negotiations under Article 50.
Commenting on the report, Baroness Verma, Chairman of the EU External Affairs Sub-Committee, said:
“It is unlikely that a bespoke EU trade agreement can be agreed within Article 50’s two-year period, so a transitional deal is vital for protecting UK trade, and jobs that rely on trade.
“The Government should focus on trade with the EU and its WTO schedules. Deals with non-EU countries are contingent on the outcome of these negotiations, and need to be sequenced accordingly.
“The complexity of the issues and the tight timetable require a significant scale-up in capacity in government departments and clear leadership across Whitehall.”
Chairman of the EU Internal Market Sub-Committee, Lord Whitty, added:
“Trade-offs will need to be made in whatever trading framework we eventually agree. The Government is committed to curbing the free movement of people and the reach of the European Court of Justice. This is incompatible with full Single Market membership.
“While an FTA would provide the greatest flexibility, and no commitment to freedom of movement, there is no evidence that it could provide trade on terms equivalent to membership of the Single Market.”
The report evaluates the four main models for future UK-EU trade and concludes:
- The European Economic Area (EEA) is the least disruptive option for trade, but it is unlikely to be reformed to limit free movement or give the UK voting rights on EU legislation.
- The Government urgently needs to decide whether or not the UK will remain in a customs union. Doing so would mean no border checks for goods between the UK and EU, but would restrict the UK’s ability to sign trade deals with the rest of the world. It does not cover services.
- A Free Trade Agreement (FTA) with the EU is the most flexible option and could lead to a bespoke deal, but would be complex and take longer than two years to negotiate. Even the most advanced FTAs do not provide terms for UK-EU trade equivalent to membership of the Single Market.
- Trade under World Trade Organisation (WTO) rules would have the most dramatic effect on trade, resulting in significant tariffs for goods and increased restrictions on services. Establishing independent WTO schedules will not be straightforward.
This report is the second of six reports published in six days from the House of Lords European Union Committee on the impact of Brexit on a range of different issues.