The pound climbed against the dollar on Friday, reaching $1.40 for the first time in almost three years.
Sterling’s rally came on the back of reports that UK retail sales fell 8.2% in January as post-Christmas lockdown measures cut down on consumer spending.
It also coincided with ONS data released on Friday showing that the UK government borrowed only £8.8 billion in January, far below economists’ expected £25 billion. Earlier pandemic borrowing had contributed significantly to the UKs national debt of £2.1 trillion.
While it reached a high against the dollar, the pound fell 0.15% against the euro, reaching €1.1538 after what had been 11-month highs on Thursday.
The last time the pound was equivalent to $1.40 was in April 2018.
Chris Williamson, chief business economist at JHS Markit, said that the UK’s PMI reading during the latest lockdown measures suggested that the economy is ready for recovery. “Although the data hint at a renewed contraction of the economy in the first quarter, business expectations for the year ahead improved to the highest for almost seven years,” he explained.
The $1.40 milestone was reached amid a surge of vaccine optimism and hopes for reduced lockdown restrictions in the UK, with a “roadmap” for easing restrictions set to be announced next Monday.
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Around 16 million UK residents have now received their first COVID-19 vaccine. The country has advanced further in tis vaccination programme than any other in Europe after being the first to approve the Pfizer vaccine.
Seven mass vaccination centres have been built in England, with the government voicing hopes that all adults may be vaccinated by the autumn.
More than 30 countries have imposed travel bans on the UK after a new strain of COVID-19 – which may be as much as 70% more infectious than the original strain – was detected in the country. Nations closing their borders include France, Germany, Italy, the Netherlands, Austria, Belgium and Israel.
Some of the travel bans imposed on the UK will last for 48 hours as leaders formulate plans to contain the spread of the mutant COVID-19 strain, while others are set to last until the end of January.
The news has caused immense disruption to accompanied UK freight, with the immediate future uncertain for the 10,000 lorries that pass through Dover each day. British supermarket group Sainsbury’s warned on Monday of fresh produce shortages if transport between the UK and Europe is not quickly restored.
The FTSE 100, London’s blue-chip index, fell as much as 2% on the open with British Airways owner International Airlines Group and Rolls-Royce down 16% and 9% respectively. As much as £33 billion was wiped out from the index’s shares.
Germany’s DAX fell 2.3%, France’s CAC 40 fell 2.4%, and the pan-European Stoxx 600 fell 1.8%, with travel and leisure stocks taking the brunt of the sell-off.
While the FTSE’s losses fell to 1.1% by the end of the first hour of trading, the impact on sterling was more extreme. The pound, which last week reached a two-year high, plunged as much as 2% to $1.3259 and 1.6% to €1.0864.
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The impact on the pound was aggravated by continued uncertainty as to whether the UK will secure a Brexit deal ahead of the end-of-year deadline, after which existing trade stopgaps with the EU will no longer remain in effect.
The value of the pound sank precipitously on Friday, falling by more than 1% against the euro and the dollar after UK prime minister Boris Johnson’s warning on Thursday that a no-deal Brexit remained a “strong possibility”.
Sterling fell 1.3% against the euro to €1.089 and against the dollar to $1.3204 in early London trading.
The pound has been under continuous pressure since Wednesday, when Johnson and European Commission president Ursula von der Leyen confirmed that “significant differences” were yet to be bridged after trade negotiations in Brussels.
The UK and EU are currently deadlocked over questions of their post-Brexit relationship, with main sticking points including competition rules and fishing rights in UK waters. The two sides have set a deadline of Sunday to reach an agreement and prevent a “no-deal” scenario that would likely cause economic chaos.
"We need to be very, very clear there's now a strong possibility that we will have a solution that's much more like an Australian relationship with the EU, than a Canadian relationship with the EU," Johnson said. Unlike Canada, Australia does not have a comprehensive trade deal with the EU, and most of its trade is subject to tariffs.
However, the UK as a nation conducts far more trade with the EU – around 47% of its overall trade compared with Australia’s 15%.
“With the UK now looking like it’s hurtling towards a no-deal Brexit, investors should adopt the brace position for swings in sterling and shares in domestic focused companies,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
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Whether or not a deal is achieved, the UK’s temporary trade arrangements with the EU will expire on 31 December.
Giles Coghlan, Chief Currency Analyst at HYCM, provides Finance Monthly with his insight into how the balance of markets and currencies may shift as December looms.
Brexit negotiations recently risked falling off the cliff edge as political posturing reached new heights. In the lead-up to the EU Leaders Summit on 15 October, Prime Minister Boris Johnson said the UK would stop negotiations outright if no credible progress was being made. Of course, in such a scenario, this would then open the door to a no-deal Brexit potentially unfolding.
The British pound has certainly been bearing the brunt of these Brexit worries throughout 2020, with sterling often falling to prices not consistently seen since the 1980s.
However, contrary to the forecasts of some commentators, talks have now advanced, and to put it in the words of EU officials: “intensified”. Those who believed a deal could be struck often reflected on how the initial withdrawal agreement was only agreed to mere weeks before the end of 2019, and it seems the UK government seeks to replicate such last-minute compromises as the final Brexit hurdle approaches.
So, after much grandstanding and posturing, daily talks have begun in an attempt to solidify a deal within three weeks, allowing the minimum amount of time needed to implement a post-Brexit trading relationship before 31 December.
Investors and traders must remain vigilant and aware of all the possibilities on the horizon. That’s why now is an ideal time to consider these possibilities and the impact they could have on the pound and financial markets more generally.
Investors and traders must remain vigilant and aware of all the possibilities on the horizon.
A clean break?
At the moment, it is still possible for a deal to be agreed upon by London and Brussels. Looking beyond the political rhetoric and grandstanding on display from both sides of the channel, a no-deal Brexit is not an ideal outcome for either parties. Of all the reasons, the sheer uncertainty and potential disruption that could be caused are of top concern.
So, if an agreement is made, this is expected to have an immediate impact on the value of the pound. We could see the pound instantly jump to $1.35 against the dollar, especially if the UK retains the same level of Single Market access as enjoyed previously. With goods still able to freely move between the UK and its European neighbours, a fruitful deal would dispel the long-standing uncertainty that has overshadowed UK economic forecasts since 2016. Sterling would undoubtedly benefit massively from the lifting of this worry from the minds of investors.
However, a final breakdown of negotiations and a no-deal Brexit is still something to be considered seriously. This outcome would likely incur an immediate devaluation of the pound to approximately $1.20, with the potential to fall further as the logistical issues of the UK’s new import/export reality are fully realised.
The third outcome, an extension of the withdrawal period and the continuation of negotiations, would likely provide a small boost to sterling’s value but not change the weekly volatility we’ve seen from the pound throughout 2020. Admittedly, such an outcome would require a re-ratification of the withdrawal agreement and signing off from all 27 EU state leaders who, given the ongoing COVID-19 crisis, may not be inclined to allow Brexit to distract from other pressing concerns for another year.
Regardless of if a deal is agreed upon or not, however, there will be other factors that could potentially affect sterling’s value in the foreign exchange markets. From geopolitics to COVID-19, I believe it is vital for investors to stay abreast of other unfolding trends that are affecting currency values in 2020.
We could see the pound instantly jump to $1.35 against the dollar, especially if the UK retains the same level of Single Market access as enjoyed previously.
Global factors
The recent jump in the pound’s value as a result of Brexit talks resuming in earnest was accompanied by a drop in the dollar’s value. This was seen as a consequence of stalling US Congressional talks regarding a COVID-19 relief package. Potentially more impactful for the dollar, though, is the upcoming US presidential election. Regardless of which candidate wins, a contested election – in which a candidate questions the validity of the results – could see the dollar’s value rapidly rise in risk off flows. The USD has been acting as a safe haven currency during the COVID-19 crisis and any potential of a Trump win would be seen as USD positive as US protectionist policies would look set to continue. However, the medium-term pressure on the USD favours a selling bias on record QE levels with interest rates set to remain low until 2023, according to the Federal Reserve’s latest minutes. If a Brexit deal is secured around the same time, some further GBP/USD upside could be encouraged by outflows from the USD.
Looking to the Bank of England (BoE), another potential change in sterling’s value could come as a result of negative interest rates. BoE governor Andrew Bailey has repeatedly confirmed such a policy is ‘in the BoE’s toolbox’ since August, demonstrating that this could help spur the country’s post-pandemic economic recovery. Thankfully for those unconvinced by this controversial policy, BoE deputy governor Dave Ramsden this week reassured investors that it was still not yet the ‘right time’ for such measures to be introduced.
Investors on alert
In summary, there are multiple ways the value of the sterling could be affected by geopolitical events this year. Volatility remains rife across global currency markets, and there is no indication of this volatility disappearing anytime soon.
This is especially relevant for investors, as research commissioned by HYCM earlier this year demonstrated that cash savings have become the premier asset class for those concerned about market uncertainty. Of the 900 investors surveyed, a massive 78% held cash savings, as opposed to the 48% with stocks and shares and 38% with property.
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So, for such investors with liquid-asset-heavy portfolios, keeping informed regarding the UK’s geopolitical situation is paramount for avoiding a sudden portfolio devaluation. Or, conversely, one should consider alternate safe-haven assets that also allow for hedging against uncertainty, such as gold, silver, copper or cryptocurrency, without the risk of long-term devaluation through basic monetary inflation.
Regardless of one’s specific strategy, investors and traders would do well to ensure they keep a level, informed head when approaching financial decisions in 2020. Despite any future potential uncertainty, I firmly believe there are still great investment opportunities to be found as the UK begins its transition outside of the EU. The challenge is finding them.
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The value of the pound fell against the dollar and euro over the weekend, as news emerged that UK ministers were planning new legislation to undercut key provisions of the EU withdrawal agreement, giving rise to fears that the UK will face an end-of-year “no deal” Brexit.
The Financial Times first reported that the “Internal Market Bill” would undermine the legal force of areas of the agreement in areas including customs in Northern Ireland and state aid for businesses, risking a potential collapse of trade talks with the EU. Downing Street later described the measures as a standby plan in case talks fall through.
Political backlash followed as Michelle O’Neill, Northern Ireland’s Deputy First Minister, described any threat of backtracking on the Northern Ireland Protocol as a "treacherous betrayal which would inflict irreversible harm on the all-Ireland economy and the Good Friday Agreement". Scottish First Minister Nicola Sturgeon also stated that the legislation would “significantly increase” odds of a no-deal Brexit.
The pound was down 0.6% against the dollar by 10am on Monday for a total slide of 1% against the dollar in the past 5 days. The pound also slid 0.5% against the euro for a total of 0.7% in the same period.
The value of the pound is now equivalent to $1.319, or €1.1145.
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The eighth round of Brexit talks is set to begin on Tuesday, aimed at forming a deal that will allow companies in the UK and EU to trade without being hindered by customs checks or taxes.
The news follows Prime Minister Boris Johnson’s imposition of a 15 October deadline for securing a Brexit deal, recommending that both sides “move on” if no such agreement is reached by that date. The proposed deadline would come far ahead of the slated end of the transition period on 31 December 2020.
Discussing the latest on stock markets, currencies and the news that Carillion will be heading into liquidation, Rebecca O’Keeffe, Head of Investment at interactive investor talks to Finance Monthly below.
The strength of sterling and the euro are seeing European stock markets fall slightly, as currency gains cap equity valuations. Sterling has been riding high both on the basis of a weaker US dollar and expectations of a softer Brexit than previously forecast. These currency moves are having a mixed effect on big corporates in the UK, where dollar weakness has given commodity prices a further boost with the big miners benefiting, while other big global companies are falling on the basis of lower dollar profits when converted back into sterling.
The government’s decision to walk away from Carillion appears to be based on optics rather than logic and looks like the wrong decision was made for the wrong reasons. There is no doubt that Carillion posed a huge political challenge for the government, which did not want to be seen to bail out another group of private shareholders and banks after suffering such a backlash from their decisions during the financial crisis. However, the prospect of the government temporarily funding existing Carillion public service contracts, alongside the likely increase in costs for renegotiating contracts with new suppliers, make it highly likely that they could ultimately pay far more than if they had provided the guarantees that Carillion’s creditors needed. It is far from clear at this stage what the wider implications will be from the liquidation of Carillion, both in terms of its impact on the construction industry and on the wider economy as a whole, not least from the enormous uncertainty that now afflicts the tens of thousands of Carillion staff and those other companies directly dependent upon it.
With recent news that the pound took a tumble over the weekend, partly attributed to the future of Theresa May as Prime Minister and the upcoming EU summit, rumours that China is looking to open its finance sector up to more foreign ownership, and updates on the latest trade announcement being teased by US President Trump after he pretty much told Japan they ‘will be the no.2 economy’ here are some comments from expert sources on trade worldwide.
Rebecca O’Keefe, Head of Investing at interactive investor, told Finance Monthly: “European markets have opened relatively flat, with the FTSE 100 the main beneficiary after sterling’s latest fall, as pressure mounts on Theresa May who is struggling to maintain her grip on power. The gravity defying US market has been the driving force behind surging global markets, so investors will be hoping that the Republicans can get their act together and deliver key US tax reform to help support the path of growth.
In sharp contrast to Persimmon’s lacklustre results and a gloomy report from the RICS last week, Taylor Wimpey’s trading update is much stronger and paints a relatively rosy picture of the current housing market. Confirmation of favourable market conditions and high demand for new houses is good, although there are early warning signs that the situation might deteriorate, with slowing sales rates and a drop in its order book. Share prices have already come off recent highs, amid fears that the sector had got ahead of itself and investors will be hoping for more help from the Chancellor in next week’s budget to try and provide a new catalyst for the sector.
Gambling companies have been making out like one armed bandits since the summer, as expectations grow that the Government will compromise on a much higher figure for fixed odds betting terminals than the £2 maximum suggested during this year’s election campaign. However, while betting shops are the focus of attention for politicians, the real action can be found on smartphones and elsewhere – with surging revenues and profits being driven from online betting. Companies who have got their online strategy right are the significant winners and although Ladbrokes Coral has seen a 12% jump in digital revenues, the comparison against online competitors such as bet365 and Sky Bet, who both reported huge revenue growth last week, has left the market slightly disappointed and sent the share price lower.”
Mihir Kapadia, CEO and Founder of Sun Global Investments, had this to say: “The last couple of days have seen two of the big global economies China and Germany report large trade surpluses underlining their robust performance over the year. In contrast, the UK economy has been on a downbeat weakening trend as Brexit and political uncertainties lead to declining economic confidence and slower growth.
Data released last month showed August’s trade deficit at £5.6 billion, and in comparison, today’s data of £3.45 billion for September has been a better than expected improvement, but nevertheless indicative of an additive gap that appears unlikely to be closed anytime soon.
While Brexit uncertainty has weakened the pound against its major peers, it had helped boost exports but in turn has also made imports more expensive. This is the short term “J Curve” effect which is often seen after a devaluation. Over the long term, the weaker pound is perhaps likely to help the trade deficit as exports rise (due to the lower pound and higher growth in the global economy) while import growth slows down due to the slowdown in the UK.”
The United Kingdom’s decision to leave the European Union (EU) had a seismic impact on the global financial markets, and the geopolitics that sustain them. But what if the so-called Brexit referendum had a different result, and Britons voted to remain in the Single Market? Would we be any better off today? This week Finance Monthly heard from Evdokia Pitsillidou of easyMarkets regarding the titled question.
By any measure, the British pound may have certainly had a better fate had Britons voted Remain. Sterling was trading around $1.48 US on the eve of the June 23rd referendum, and even reached $1.50 just after polling stations had closed. Hours later, sterling was down to $1.33, having lost 10% against the dollar and reaching its lowest level in 31 years.[1]
But the bloodbath was not over. By October, the pound had dropped below $1.22 after newly appointed Prime Minister Theresa May signaled she would pursue a “hard Brexit” from Brussels. It was during this period that the sterling found itself trading at 168-year lows against a basket of other currencies.[2]
Although the pound was on a long-tern downtrend prior to Brexit, it is inconceivable it would have depreciated so quickly had the Brexit vote gone in favour of the Europhiles. Had the UK opted to remain, the pound may be lower than it was on the eve of the referendum, but not 18% lower as it is today. Brexit was therefore not just a defeat for the Europhiles, but for the once mighty sterling.
Brexit had the opposite effect on British stocks. The sharp depreciation in the pound was a boon to the export-oriented FTSE 100 Index, which opened 2017 on the longest run of record highs since 1984.[3] By January 10, London’s benchmark index had established its longest winning streak on record, printing nine straight days of record gains.
British stocks have returned nearly 19% since the Brexit referendum and are up more than 28% year-over-year. Underpinning their growth is more than just a weaker local currency. Less than two months after the Brexit vote, the Bank of England (BOE) slashed interest rates for the first time in over seven years and expanded the size of its asset buys in an extraordinary effort to stave off recession. The Bank’s moves may have been almost unthinkable had the UK voted to remain.
Just a few years prior, experts had tipped the BOE to be the first major central bank to raise interest rates. While the Fed beat it to the punch, it highlights just how unlikely the Bank’s rate cut would have been had Brexit gone the other way.
For policymakers, the hefty dose of monetary easing was justified, given they had just made their biggest quarterly downgrade of growth forecasts on record.[4] Thankfully, the British economy has held relatively firm over the past seven months, but that may to change moving forward once the British government triggers Article 50 of the Lisbon Treaty, the formal mechanism for leaving the EU.
Brexit may have also unleashed a wave of pent-up populism across Europe that is threatening to leave Brussels behind. Following the UK vote, nationalist movements in France, Germany and Italy are awaiting their opportunity to break away from Brussels. With elections in France and Germany coming up, investors are bracing for a potentially volatile year in the market.
The outlook on the global market wasn’t good before Brexit, and it certainly isn’t any better in the wake of the landmark vote. Concerns about free trade, economic growth and financial market stability have been exacerbated by Brexit, and the negotiations for the separation have yet to even begin.
A High Court ruling last month stipulated that Brexit cannot happen without parliamentary assent, setting the stage for a bigger legal battle for the British government. Prime Minister May appealed the decision, but may be upheld by the Supreme Court later this month.[5] For the Brexiters, this may mean a contingency plan. For investors, this may mean greater uncertainty about when, and if, Article 50 will be implemented. And as we know, uncertainty is the bane of the financial markets.
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[1] Katie Allen (June 24, 2016). “Pound slumps to 31-year low following Brexit vote.” The Guardian.
[2] Mehreen Khan (October 12, 2016). “Pound slumps to 168-year low.” Financial Times.
[3] Tara Cunningham (January 10, 2017). “FTSE 100 record longest run of closing highs since 1984 as Brexit fears hurt pound.” The Telegraph.
[4] Catherline Boyle (August 4, 2016). “Bank of England cuts key rate for the first time in over seven years to 0.25%.” CNBC.
[5] Reuters (January 11, 2017). “UK government expects to lose Brexit trigger case, making contingency plans – report.”
