Thursday was a torrid day for Sterling exchange rates as the currency was sold off in dramatic fashion, especially in the afternoon owing to some Brexit related updates. Cable, the name for the pound to US dollar pairing fell as low as 1.2780 which is the lowest level the pair have traded at since July. Interestingly this change in fortune for the pound comes less than week after the pair hit a 9-month high when GBPUSD traded over 1.33 so this demonstrates the how quickly the pound has been sold off. Over the past week GBPUSD has lost over 3% and the market movements for GBPEUR tell a similar story.
The reasons for this sterling weakness revolve around the plans from the UK government to amend or overwrite parts of the existing withdrawal agreement. There are concerns that the UK government plans to break international laws in this respect, and the potential for trust to be broken between UK and EU negotiators has spooked the markets and the pound has been sold off as a result.
Emergency talks are ongoing between both parties, and this comes shortly after UK Prime Minister, Boris Johnson highlighted that the UK remains prepared to walk away without a deal in place which is also a concern within financial markets.
At the moment the schedule for Brexit is for a deal to be arranged by the 16th of October, which is around the time an EU Summit will be held so I think there could be potential for market movement around this time owing to the importance of the date. The market movement could be in either direction as so far whenever talks of a Brexit deal being agreed look promising we’ve seen the pound climb whereas when there are talks of no deal the pound tends to fall as a result.
According to political analysts, the chances of a no-deal Brexit currently sit at 50% and with the pound selling off in dramatic fashion yesterday this prediction is being reflected in the GBPEUR rate.
The UK government has outlined plans to include a ‘United Kingdom Internal Market Bill’ which would allow all parts of the UK to trade amongst each other but the EU has taken issue which this and believes that it could put the Good Friday Agreement at risk. EU leaders have told the UK to withdraw the new legislation by the end of September otherwise trade talks are off and this has concerned the markets as previously outlined.
Outside of politics the pound has got off to a slightly positive start to the day, although the currency has along way to recover the losses of this week. The UK economy continued to recover in July we have found out this morning, after GDP figures show that the UK economy grew by 6.6% during the month. Economic output remains well below pre-lockdown levels, but the positive sign is that this is the third consecutive month of growth for the UK. This 6.6% growth is a fall from the 8.7% growth we saw in June, and the UK economy remains just under 12% smaller than it was at the beginning of the year before lockdown measures were implemented to stem the tide of coronavirus cases.
If the economic recovery fizzles out I think we could see the pound impacted, and I expect the services sector within the UK to remain in focus as it covers around 80% of the UK’s economic output.
Busy Start to Next Week for UK Related Economic Updates
Economic data releases out of the UK early next week could also influence the pound’s value due to the significance of the releases. On Monday there will be an Inflation Report and also a vote within Parliament regarding Brexit. The Unemployment Rate and Average Earnings update will then be released on Tuesday so we could see a busy start to the week for GBPEUR exchange rates. The lowest the pound to euro rate has fallen over the past year is 1.0530 and yesterday the pair hit the 1.07’s so we may see the lower levels tested depending on the outcome of the ongoing talks. If you wish to discuss an upcoming transfer involving the pound, please feel free to get in touch.