- UK leaving EU on January 31
- Deal negotiated during 2020
- PM signaled UK will conduct fruit trade talks with US at same time
In a sign of strong will, Boris Johnson signaled that the United Kingdom would be negotiating with both the European Union and the United States at the same time.
Johnson is aiming for a free trade agreement with both, but it is probably much more realistic to get a free trade agreement with US than it is with the EU. After all, part of the strategy by the Europeans has been to punish the British for leaving. They are concerned about other countries trying to leave the EU, as there are a lot of discontented people in places like Poland, France, Italy, and many other countries.
Quite frankly, if another large economy leaves the union, that could be it for the EU.
The negotiation timeline gets accelerated due to the fact that the UK will be leaving the EU at the end of January. Granted, there is a bit of a “standstill period” between then and December, when nothing really changes. However, there is still a sense of urgency being felt, something that has been desperately needed.
With the Tories running the British government, things will finally get done, as they ran their campaign on a platform of getting out of Europe.
The UK is now free to negotiate with other partners around the world. By getting the Americans involved, this puts a significant amount of pressure on the EU, as the markets are similar in size. In other words, the British are essentially telling the Europeans that they can take their business elsewhere.
Beyond that, what is particularly telling about this scenario is that Donald Trump and Boris Johnson get along quite well, so it’s very likely that the Americans and British will come to terms with a deal rather quickly. In fact, Trump has already suggested this in the past, indicating that Great Britain would be at the “front of the line” when it comes to deals.
Possibility of free trade deal
Looking forward, the Americans and the British will possibly have something close to a free trade deal, if not an actual free trade deal. How things play out with the EU might be a completely different scenario, but more than likely, the Europeans will find it is in their best interest to bargain in good faith.
Now that the UK has a unified government, and perhaps even Donald Trump on their side, it’s very likely that the momentum has shifted to London. Furthermore, there are a lot of concerns out there that Donald Trump may move his focus to trade deals with the European Union now that “Phase 1” is going to be signed between the Americans and the Chinese. This could be a rough year for Europeans.
- 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.
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.
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.
- Eurozone economy showing signs of recovery
- Speculators back out of euro short positions
- Brexit fears dominate 2020 forecasts
The GBP/EUR exchange rate has been sliding since the beginning of the week when it opened at 1.1736. The downtrend continued today as speculators closed out their short euro positions on the back of Eurozone optimism.
The GBP/EUR closed the week at 1.17278. The currency pair reached a low of 1.16770 around the middle of the week, and a high of 1.17489. It mainly stuck around the 1.17 level, though.
Euro saw some gains amid hopes for a better 2020
The Eurozone has had a tough 2019, with many of the bloc’s economies slowing down or even contracting. This put a lot of pressure on the euro.
The US dollar, on the other hand, did well for most of the year. This was mainly on the back of the resilience exhibited by the economy in the US.
Thus, the weak results out of the Eurozone and the US dollar’s strength led to the euro struggling throughout 2019.
However, December seems to have buoyed confidence as it seems the Eurozone might be recovering. Somewhat better economic data and the truce between the United States and China have improved business confidence.
This optimism has led to the euro seeing some gains, especially since the hope is that 2020 will be better.
There are also concerns regarding the US dollar. Indications are that the Fed could take a more dovish stance next year if US forecasts don’t improve.
Euro strengthened as investors closed short positions
The euro also saw some gains today as investors closed out short positions. Some experts say this is based on optimism. Others claim it’s a matter of “negative sentiment running out of steam.”
Ulrich Leuchtmann, a Commerzbank analyst, stated, “What I’m seeing here, it’s mainly some euro strength. This very negative euro sentiment has prevailed over 2019 and has run out of steam … coming to this period of low liquidity, more people are more inclined to remove those short positions.”
Regardless of the reason, leveraged funds reduced their short euro positions from $14.84 billion to $9.16 billion, according to Reuter. This occurred in the second week of December, with more investors following suit later.
The low level of liquidity in the market due to the holidays amplified the effect of these moves. This led to the euro seeing some gains. However, there is concern that it’s only a temporary situation as there are a significant number of options set to expire between $1.1155 and $1.1160. This could eradicate at least some of the euro’s gains.
Pound continues to feel the pressure of Brexit
The pound has been suffering lately, despite having seen some gains after the Conservatives won the UK election. Last week, Prime Minister Boris Johnson introduced a clause into the Brexit bill outlawing any extensions.
The UK will leave the EU at the end of January 2020. However, the UK will then enter a transition phase, which will involve further negotiations. During this time, the country will still follow the major laws in the EU.
The end of the transition phase is set for December 2020. Many experts believed this phase would have to be extended beyond December. Many issues need to be addressed, and eleven months is a short timeframe to do so.
Ursula Von der Leyen, President of the European Commission, suggested that Johnson should reconsider his stance on delays. She said she’s seriously concerned over the time available for negotiations.
The repercussions could be significant for both sides if an effective deal isn’t reached. For example, if the UK leaves the EU without a trade deal, the country would experience serious economic disruption. Restrictions on quantities sold in the EU would be applied, as well as taxes.
This has, of course, placed pressure on the pound. It’s likely that, throughout the transition phase, the pound will mainly be driven by news regarding the negotiations.
- 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 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.
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.
Thursday morning saw the release of November’s figure of new car sales in the United Kingdom, which exhibited a decline of 1.3%. It’s not a surprising result seeing as it continues 2019’s trend of declining new car registrations. However, it does drive home that Brexit is having a significant impact on the UK economy.
Ian Plummer, Auto Trader’s Commercial Director, explained that Brexit was hurting the UK industry as well. Manufacturers are under a lot of pressure in this climate. The pound’s value is unstable, and no one knows what trading regulations will look like in the future.
The investors’ shaky confidence in the pound led to the GBP/USD holding steady, despite weaker-than-expected US economic data. The GPB/USD was trading at $1.3130 on Thursday morning.
Pound supported by Conservative lead in the polls
The market is still holding on to hope when it comes to the pound. UK opinion polls show that the Conservative Party is still in the lead. Thursday’s poll averages showed the Conservatives in the lead with 43%, followed by the Labour Party with 33%.
According to Jim Reid, a Deutsche Bank analyst, the pound has received some support from investors. They hope the Conservatives will win the elections, which should lead to Parliament more smoothly ratifying the Withdrawal Agreement. The result would be less uncertainty in the short-term of how Brexit would proceed.
Market sentiment was very positive regarding PM Boris Johnson’s Conservatives winning, so much so that the pound had risen by 1.5% against the US dollar. It also reached the highest level against the euro since May 2017.
US dollar flat despite underperforming economic data
The US dollar remained flat against the pound and other major currencies. This is despite the fact that the ISM non-manufacturing reports and the ADP employment figure underperformed forecasts.
Investors were quick to overlook the data. Instead, they focused on the US dollar as a safe-haven asset. This is amid continued worries over the issues that continue to plague the trade negotiations between the United States and China.
According to Reuters, China stated that the tariffs should be lowered if the two countries reach a phase one deal. However, the two sides haven’t made much progress and seem to be stuck in talks over “core issues of concern.” These include the Hong Kong protests and how China is treating their Uighur Muslim minority.
In fact, on Wednesday, China warned the United States that bilateral cooperation could suffer. This is in response to US legislation demanding a stronger reaction to how Beijing is treating Uighurs in Xinjiang.
Despite these issues, President Donald Trump stated on Wednesday that talks were proceeding very well. A Chinese source also told Reuters that both leaders had discussed reaching a deal. The source also said, “officials are now finishing the work.”
GBP/USD could slide on the back of US nonfarm payrolls
On Friday, the US nonfarm payrolls figure for November will be released. It is expected to increase to 180,000 from 128,000. December’s Michigan consumer sentiment index will also be released tomorrow. It is expected to decline slightly to 96.5 from 96.8.
If the two figures come in as expected, it would be a sign that the US economy is starting to improve. This would increase market confidence and lead to gains for the US dollar.
The pound, on the other hand, will be mainly driven by politics at least up until the December 12 elections. Essentially, any sign that the Labour party is gaining on the Conservatives will put pressure on the pound.
- Conservatives lead has dropped from 14 points to 12 points
- The Pound has weakened on the back of UK election polls
- The US will publish the second estimate of Q3 GDP and October Durable Goods Orders
The latest news from the UK shows that the Conservatives’ lead is decreasing. The lead has dropped from 14 points to 12 points this week. Moreover, the Pound has weakened on the back of UK election polls.
Early election to guide direction of GBP
The UK has published the October BBA Mortgage Approvals which fell to 41.219K from 42.216K. The situation around Brexit has a big influence on the UK and GBP, and the early election should be the main driver in the coming days.
Latest US data also fails to impress
On the other side of the Atlantic, the latest US data is also disappointing, with the CB Consumer Confidence Index falling to 125.5 in November. The October number was upwardly revised to 126.1.
This week, the US will publish the second estimate of Q3 GDP and October Durable Goods Orders, which are expected to be in line with expectations. The US will also release Pending Home Sales and Personal Income, but these figures will not have a big influence on the financial markets.
While trade tensions between US and China are still bringing about market uncertainty, US officials report that good progress has been made. In fact, US President Trump said this Tuesday that the US is in the “final throes” of reaching a trade deal with China.
Background noise and conclusion
Polls about the election in the UK are probably going to be the major driver for the GBP in the coming days. It is also important to mention that Boris Johnson promised Brexit before Christmas if the Tories win the election. A Tories victory is looking likely, and will offer an alternative scenario to a Labour Party election victory which would send the Pound lower.
In the US, trade tensions between the US and China is still generating market uncertainty despite good progress having been made. In the case of economic news, the focus is on US October Durable Goods Orders and the second estimate of the Q3 Gross Domestic Product this Wednesday.
- Brexit Party has decided to step down from 43 additional constituencies
- UK PM Boris Johnson says all Conservative candidates pledged to support his deal
- Conservatives leading in latest opinion polls on upcoming election
According to the latest news, the Brexit Party has stepped down from 43 additional constituencies where Labour won. This move will facilitate the way for a Conservative majority, which will increase the chances for the UK PM’s withdrawal agreement to pass Parliament.
Boris Johnson said that all Conservative Party candidates have supported his deal, but the market is still waiting for the confirmation. It is also important to note that the pound advanced on the news, which lifts chances of the upcoming Parliament passing Johnson’s Brexit deal.
UK election campaign takes center stage
Johnson stated on Monday that he will deliver Brexit on time. He introduced a fresh round of tax cuts and also said he will increase unemployment allowance. Finally, he will also increase the structures and buildings allowance from 2% to 3%.
The political news remains at the forefront for the investors as markets continue to focus solely on the upcoming general election, Brexit, and trade tensions. The main political parties in the UK are expected to publish their manifestos, and the pound will become headline-driven as the election gets closer.
One of the major political events in the UK this week will be a television debate between Boris Johnson and Labour leader Jeremy Corbyn, which may affect some market expectations. More opinion polls are probably going to be the major driver for the pound in the upcoming weeks. In the latest opinion polls, Boris Johnson’s Conservatives are leading and the Brexit Party pledged not to contest Conservative Party seats.
Background noise and conclusion
The UK didn’t release any relevant economic data over the last several days. The macroeconomic calendar will remain “light”, with nothing scheduled for Monday, and only the CBI Industrial Trends Survey on Orders expected for Tuesday.
The situation around Brexit has a big influence on the financial markets, with the early election in December expected to be the main driver.
- The UK retail sales fell by 0.1% in October
- There are no macroeconomic releases scheduled in the UK this Friday
- EU’s and German’s GDP expand modestly
The UK economic outlook is weakening this week, the EUR/GBP pair has fallen from 0.865 to 0.854 ant the current price stands around 0.856. The UK’s Prime Minister Johnson said recently that the government would not be extending the Brexit transition period beyond January 31st. The situation around Brexit has a big influence on this currency pair, and the early election will be the prime GBP driver in the coming weeks.
According to analysts, the Conservative Party will gather enough support to pass Boris Johnson’s Withdrawal Agreement. The UK main opposition party has declared it will seek to nationalize telecom giant BT and the political issues will remain at the forefront for the UK.
The UK retail sales fell by 0.1% in October
The latest economic news from the UK was quite discouraging. The UK retail sales fell by 0.1% in October which is below the market’s expectations. The UK also announced this week that the kingdom’s Total Trade Balance posted a £ 12.541B deficit, while Industrial Production declined by 0.3% MoM and by 1.4% YoY. It is also important to note that manufacturing production also declined in the same period yet the UK avoided recession, growing by 0.3%, slightly below the 0.4% expected.
The latest economic data from the EU also failed to impress. The EU’s and Germany’s GDP increased slightly in the third quarter of the year but this is not enough according to the analysts. Signs of a further economic slowdown in the Union are keeping the upside limited for this currency pair for now. The European Central Bank left its monetary policy unchanged at its latest meeting, and the economic slowdown continues entering Q4. Inflation in the EU is still below expectations and this situation confirms speculation that the ECB won’t hike rates until 2020. The ECB´s president, Christine Lagarde, also warned that the uncertainty related to geopolitical factors is a threat to economic growth.
Background noise and conclusion
The EU markets are mixed this Friday but the FTSE 100 is the only major index in the red today. The latest economic data from the EU failed to impress and the situation in the UK is not much better. The Union’s economy remains at risk of recession and the market is waiting for the ECB meeting next Thursday.
The pound is supported currently by the fact that the Conservative Party continues to hone in on its rivals. This currency pair is highly sensitive to the early election in the UK and the final outcome of Brexit. The EUR/GBP pair is less volatile than other euro or pound based crosses because of the economic closeness and interdependence between the two.
- UK CPI misses slightly
- Core CPI as expected
- PPI Input weaker than expected
- PPI Output weaker than anticipated
The UK released several figures on Wednesday to give traders an idea as to how the underlying economy is going. With the market paying so much attention to Brexit right now, these negative numbers certainly don’t inspire confidence.
As a result, it shows just how far the Bank of England is from being able to raise rates. Additionally, as there were a couple of dissenters last time that suggested cuts were needed, these numbers certainly won’t help the situation.
The Consumer Price Index measures inflation in a basket of common goods that the average person in the United Kingdom may buy. It is looked at as a major influence on how a central bank measures inflation.
With CPI coming out at 1.5% as opposed to the expected 1.6%, perhaps inflation just isn’t showing up in the United Kingdom. If that is the case, then the market should expect to further see that the Bank of England is even more removed from being able to raise interest rates than once thought.
The fact that the numbers have missed again will put even more downward pressure on the British pound. On the other hand, it could lift UK markets up if it is seen that the Bank of England may try to do something to loosen monetary policy.
Producers Price Index figures were released in both the input and output versions, with the output coming in at -0.1% as opposed to flat, and the input version coming in at -1.3%, as opposed to the expected -1.1% for the month. This shows that less is going into the manufacturing economy than anticipated, which is crucial to the economy.
Brexit is, of course, the main attraction here. The headlines coming out of Brexit and the possibility of getting some type of resolution to that situation will be crucial for markets going forward. Therefore, the usual effect of the CPI figures may be dampened a bit.
That being said, it should not be ignored. It gives us a “look under the covers” when it comes to how the UK economy is doing.
It isn’t exactly falling off of a cliff, but growth seems to be somewhat elusive. For what it’s worth, it should be noted that Core CPI came in at 1.7% as expected.
UK economy going forward
It’s very likely that the UK’s economy will be a place value investors continue to flock to, and the signs of Armageddon just aren’t there.
There has been a lot of scaremongering, but the European Union has a lot of its own issues anyway, so being tied to it may not be a place of strength for the British in the long run. That being said, it still is a very dicey proposition in the UK for the short term.
- Industrial Production declined by 0.3% MoM and by 1.4% YoY in UK
- The US will probably refrain from slapping tariffs on European cars
- Early election a huge moment for UK economy
The GBP/USD pair has advanced recently to 1.2897, but the pair is currently pressured by softer-than-anticipated UK data. The UK published this week that the UK Total Trade Balance posted a £12.541B deficit, while Industrial Production declined by 0.3% MoM and by 1.4% YoY.
It is also important to note that manufacturing production declined in the same period, but the UK avoided recession, growing by 0.3%. This is slightly below the 0.4% expected.
Despite this, the direction for GBP/USD remains bullish in the short term, supported by the fact that the United Kingdom and the European Union reached an agreement on the UK’s departure from the Union.
Early election to be a defining factor
The GBP/USD is trading this Tuesday around 1.2844, with the US dollar losing some of its gains in a risk-averse environment. Uncertainty is surrounding trade negotiations between the US and China. According to the latest news, the meeting between Trump and Xi Jinping could be delayed until December. Investors and traders are still waiting for information about tariffs removal before they make any decision.
The latest economic news from the UK was quite discouraging. The UK’s Total Trade Balance posted a deficit and industrial production declined. Despite this, the direction for GBP/USD remains bullish, but early election should be the prime GBP driver in the coming weeks.
The pound is also supported by comments from Brexit Party leader Nigel Farage, who said he won’t contest Conservative seats won at the last election. He will instead go after the seats held by Lib Dem and Labour. One should also mention that Scotland First Minister Nicola Sturgeon said she will not support Boris Johnson.
On the other side, the US dollar is highly sensitive to US-China trade relations and on tenterhooks with regard to the US economy in general. While still doing well in terms of economic growth, the US will probably refrain from slapping tariffs on European cars, according to the latest news this Tuesday.
Background noise and conclusion
Keep in mind that this currency pair is highly sensitive to the US-China trade relations and Brexit.
The major direction for this pair remains “bullish-neutral”, but as long the price is below 1.3000, we cannot have a clear picture. This is in spite of the large degree of uncertainty which surrounds the current market.