GBP/EUR Flat as Markets Hold Their Breath for Brexit

Alan Penny

2 January 2020

3 min read

Brexit news

  • UK markets holding their breath for Brexit
  • German PMI beats forecasts but still lower month-over-month
  • Investor sentiment improves amid hopes of a better 2020

Thursday morning saw the GBP/EUR exchange rate remain flat at approximately 1.179. This month’s Brexit and unimpressive German PMI figures weighed on pound and euro respectively, keeping the rate steady.

This month’s Brexit and unimpressive German PMI figures weighed on pound and euro respectively, keeping the rate steady.

Despite weak German manufacturing figures, investor sentiment still improved. The figures may have still indicated a contraction, but they were higher than forecasts. Furthermore, orders have stabilized, which some are taking as a sign of economic recovery.

In the UK, markets are on edge as the date for the UK to depart the European Union creeps closer. Worries over post-Brexit negotiations with the EU aren’t helping the situation either.

Brexit soon to be a reality

January 31st is creeping closer, and markets are on edge as the UK’s departure from the EU becomes a reality.

Once Brexit happens, the UK will go into a transition phase. Negotiations with the EU will take place, covering a wide range of issues, including trade.

The pound will likely be driven mainly by the evolution of the negotiations between the bloc and the UK. Many are concerned that the 11-month window allotted for the negotiations is insufficient.

UK Prime Minister Boris Johnson introduced a clause in the Brexit bill that forbids any delays. This continues to worry investors as the UK may be forced into a bare-bones deal.

Samuel Tombs, Pantheon’s Chief UK Economist explained that markets aren’t aware of the level of “Euroskepticism” among the new Tory MPs. The PM is also reaffirming the commitment to not extend the period of transition beyond December 2020. “The stage is set, therefore, for Brexit risk to dampen the economy again in the second half of next year,” he said.

Rabobank’s head of foreign exchange strategy, Jane Foley, shared her views with the Financial Times. “In the UK, the year is unlikely to bring much reprieve from Brexit-related news. Trade negotiations between the UK and the EU will dominate much of the domestic political landscape this year.”

She also stated that if negotiations are difficult, a no-deal Brexit could still become a reality. This would put pressure on the pound, but could also drag down the euro.

Today, IHS Markit will release the UK Manufacturing PMI figures for December. The numbers are predicted to exhibit some improvement, with forecasts at 47.6 from 47.4.

However, this is unlikely to boost the pound seeing as the UK industry is still contracting.

Euro fails to gain against the pound

This morning, IHS Markit released the German Manufacturing PMI for December. The figures were better than expected, rising to 43.7, from a forecast of 43.4. However, it wasn’t enough to push the euro up against the pound.

Despite figures being better than expectations, they still show that the German industry is contracting. It’s the 12th month of contraction in a row . The PMI was also lower than November’s, which came in at 44.1.

Furthermore, new business inflow also declined, representing the 15th consecutive month of declines. This drop is the result of trade uncertainties and the poor global economic situation. Employment also declined at one of the fastest rates in the past ten years.

Despite this situation, investor sentiment increased to the highest level in 15 months. This is on the back of new orders stabilizing to some degree, as well as hopes that 2020 will improve.

Further market optimism is driven by developments between the US and China. US President Donald Trump stated that he expects the “Phase One” deal to be signed on January 15th.

As Germany’s economy relies quite heavily on exports, this has improved market confidence. Investors are now more hopeful that Germany’s economy will soon recover.

Written By
Alan Penny

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