Sterling bounces back on hopes for a Brexit deal

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4 December 2017

Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

The Pound was buoyed by strong UK data and word that Prime Minister May was ready to increase her offer for the amount to be paid to settle UK obligations to the EU as part of the Brexit process. Sterling rose against every other major world currency as a result.

M
eanwhile, the Euro and the US Dollar traded in tight ranges over the week, despite the news that the Senate had followed the House in approving a significant reduction in US corporate rates late on Friday night.

This week should be relatively calm while markets wait for the ECB and Federal Reserve meetings later in the month. However, the Reserve Bank of Australia meeting on Tuesday and the US payrolls report for November out on Friday should make for some volatile trading in the respective currencies.

Major currencies in detail

GBP

Reports that European negotiators are ready to allow Brexit talks to proceed to the next stage at the December European Council meeting added to positive Pound sentiment. The main uncertainty is now whether an agreement can be reached on the status of the Irish border after Brexit.

Markets now look to PMI business activity data in the services sector out on Tuesday. We think risks are skewed to an upside surprise, which could provide further fuel for the recent Sterling rally.

EUR

We now go into a data-light week in the Eurozone, when the main reference will be German industrial production out on Thursday. Aside from that, markets will remain focused on headlines regarding progress in German talks to form another Grand Coalition and avoid new elections. We expect the Euro to continue trading in a holding pattern this week while we wait for the key ECB meeting on 14th.

USD

A very quiet week with little data or fresh information out of the US ended Friday with news that Senate Republicans had managed to pass a tax package focused on dramatically lowering the corporate tax rate. The House had already passed its own version, and the bill now moves to reconciliation, where a new package agreeable to Republicans in both the House and the Senate should be agreed on. We do not expect this to be a problem for the Republican leadership.

The Dollar reacted positively in early Monday Asian trading. This additional fiscal stimulus will hit a US economy that is already hovering near full employment, and Federal Reserve officials like Bill Dudley have already warned that, at the margin, the tax cut implies the need for higher rates. This should be a positive for the Dollar into 2018.