EUR/GBP Flat as Markets Focus on the Winter Holidays

Alan Penny

23 December 2019

3 min read

Brexit puzzle pieces

  • Winter holidays prompt low liquidity
  • German import prices decline at a slower rate
  • Markets seem unsure over Brexit

Monday saw the EUR/GBP exchange rate holding steady at £0.8537. This is despite lower German import prices and Brexit concerns.

The euro and the pound are likely to remain steady over the winter holidays due to poor liquidity.

The markets are quiet mainly because of the winter holidays. The euro and the pound are likely to remain steady over the winter holidays due to poor liquidity.

According to Stephen Gallo of BMO Capital Markets, traders shouldn’t make assumptions about any movements. He referenced the slight dip of 0.6% the pound experienced against the euro and the US dollar at one point.

Gallo stated that the pound’s decline over the previous few days was over Brexit concerns. However, he further said, “[…] one wouldn’t draw too many conclusions about today’s moves as liquidity is poor.”

German import prices slowed their decline

The German import price index declined by 2.1% in November 2019 year-over-year according to Destatis, Germany’s Federal Statistical Office. October saw a YOY decline of 3.5%, while September saw a drop of YOY 2.5%. Markets expected a decline of 2.3%.

On a month-over-month basis, the import price index increased by 0.5% compared to a decline of 0.1% in October.

The YOY decline was mainly the result of a drop in energy prices of 12.9%. The import price index only declined year-over-year by 0.6% when excluding energy.

The German export price index declined YOY by 0.1% in November, compared to 0.2% in October. Month-over-month, the export price index held steady, as it did in October.

UK Conservative win increased business confidence

After the Conservatives won the UK election, markets seemed extremely positive. Business leaders in the UK experienced an increase in confidence that hadn’t been seen since the 2016 referendum.

The Institute of Directors (IoD) polled its members right after the election. Net confidence in the British economy for 2020 jumped to +21% in December from -18% in November. Respondents also exhibited increased confidence in their own companies, which hit 46% from 26%.

According to Tej Parikh, the chief economist at IoD, the Conservative win was a definite positive for many business leaders.

“A firm majority government means that business leaders, whatever their personal views, now at least have a framework around which they can put in place plans to invest, hire, and expand,” Parikh said.

Brexit still causing uncertainty

However, it hasn’t been all smooth sailing, as the rollercoaster the pound has been on for the past week shows. The pound lost all its election-induced gains in less than a week.

Prime Minister Boris Johnson announced intentions to stop any extensions of the Brexit transition period. This sparked new fears that a no-deal Brexit was still was a possibility.

Business leader confidence in the UK has been sensitive to any developments related to Brexit, according to IoD. This is likely to still be the case throughout the upcoming post-Brexit negotiations.

On Friday, though, the pound rallied as PM Boris Johnson’s withdrawal deal passed with 358 votes for and 234 against. The UK will officially depart the European Union on January 31, 2020.

Subsequently, the UK will enter into a post-Brexit transition phase until December 2020. During this time, the UK and the EU will have to hammer out a free trade agreement.

If they don’t, a no-deal Brexit will happen thanks to a clause Johnson introduced into the bill. According to this clause, it is now illegal for any minister to delay or extend the timetable.

This clause has some investors worried. Eleven months isn’t enough time by far, according to some experts, for the UK and EU to negotiate a deal.

Dean Turner, a UBS Wealth Management economist, stated that negotiating a deal in this timeframe was ambitious. The only way he sees it could happen is if Johnson accepts an “off-the-shelf deal or a bare-bones one.”

Next year will likely see the pound continuing to be affected by Brexit. This time, though, it will be by post-Brexit negotiations. Details pertaining to the trade agreement will affect both the euro and the pound.

Written By
Alan Penny

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