The pound has continued its recent topsy turvy nature beginning this week on a slightly worse footing, as last week’s EU summit failed to produce the news many had anticipated and we edged closer to a no-deal in the market’s eyes. Yesterday however there were fresh signs of optimism of a deal, which saw the pound to euro rate make gains of 1%. and the pound to US dollar 1.5% as the UK and the EU agreed to restart trade talks.
The interbank rate on pound to euro has risen as high 1.1092 this morning and GBPUSD 1.3149, as investors get wind of the news and anticipate some fresh and more positive developments ahead.
Brexit has been a key driver of sentiment for the pound with a general expectation that no-deal is bad for the pound and the UK economy, whilst signs of a deal have led to the pound rising.
Predictions I have seen range from as low as parity on pound to euro in the event of a no-deal, whilst signs of a deal could see pound to euro levels rising into the mid-teens. Of course, no one can say exactly what will happen but there has definitely been a pattern of sterling strength on signs of a deal, whilst no-deal prospects have historically generally seen the pound weaker.
Will the Pound Rise Further?
There is some potential for the pound to rise higher in the future as the market seeks some more positive news to enable investors to have the confidence to get behind the pound. Essentially financial markets crave certainty around the financial outlook and whatever your stance on Brexit, the prospect of a no-deal doesn’t offer much clarity around the state of the UK economy ahead.
Having said that, it is very difficult to determine exactly what will happen, and exactly how the market will react so there is always the potential for surprises in the currency market. We will therefore learn more as the news unfolds and should there be a deal, the general market expectation is that the pound will rise higher.
However, should this recent optimism turn out to be a false dawn, like we have seen on so many previous occasions, then the pound may of course quickly undo some of these more recent gains.
When Will This Happen?
The talks are kicking right off again today so there could at any moment be some more positive news which would help the pound to rise higher. The EU negotiating team is in the UK until Sunday and the Financial Times reports today that talks will take place every day until a deal is reached.
This added impetus is the reason for the rise we saw in sterling yesterday and might well provide a platform for further gains as this week progresses. The next week could see some bigger movements as investors get closer to determining the likelihood or not of this all moving ahead.
I think we can argue that if the talks are not going as well as they are predicted to be, and there is no agreement going into the weekend then there is potential for the pound to lose value.
The flipside might be that if there is a framework for continued negotiations next week for example, as a backstop to this week’s talks, if this week’s talks have proved ineffective, then there could be some increased volatility in the coming weeks for markets to digest.
US Elections Could Prove Crucial for the Pound Too
The US elections are also becoming more and more important, with the election now just 12 days away. There could be increased volatility for the currency market in general as we hear of the latest news over who is going to be the next US President.
Looking forward, the expectations for the US dollar has been linked to US dollar weakness on a Biden victory, whilst a Trump win could mean US dollar strength. An added twist is that the US dollar is a safe haven currency and this can sometimes see the dollar rise in times of uncertainty, where other currencies might typically have weakened.
This can affect the pound since big moves on the world’s most heavily traded currency the US dollar, can drag and pull currencies it is connected to sharply, like the pound and the euro. It will not be surprising to see some added volatility for the pound against all currencies around the time and result of the US election, please contact us to learn more about what we might expect.
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