News of UK-EU financial services deal sends Pound sharply higher

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1 November 2018

thomasdodds

Sterling surged back above the 1.29 mark against the US Dollar on Thursday, rallying by over half a percent during Asian trading and by a similar amount this morning following some positive news out of the Brexit negotiations.

A
ccording to The Times newspaper, Theresa May is close to agreeing a financial services deal with Brussels that would give the UK’s financial sector access to EU markets after Brexit. The report suggested that a tentative agreement was struck on all aspects of a future partnership on services and the exchange of data. Investors breathed a sigh of relief off the back of the encouraging news, briefly sending the Pound to its strongest position in a little over a week.

Next up for the Pound will be the Bank of England’s monetary policy announcement and quarterly Inflation Report release at midday today, known as ‘Super Thursday’. Policymakers are almost certain to keep rates unchanged, with focus instead firmly on the bank’s communications regarding their view on the state of the Brexit talks and the potential impact of a ‘no deal’ on the UK economy.

We do not expect any significant new information out of the meeting, with the bank likely to adopt a wait-and-see approach ahead of the UK’s departure from the European Union. The vote on rates is very likely to remain unanimous in favour of no change, although there is a slight risk of a growth forecast downgrade given the prolonged Brexit discussions.

Encouraging Brexit news buoys Euro

Positive news on the Brexit front helped drag the Euro higher this morning, reversing all of its losses from Wednesday to trade just shy of the 1.14 level against the greenback.

The US Dollar was well supported on Wednesday by some broadly positive domestic economic data. The ADP employment change number, seen as a good gauge for the strength of the more significant nonfarm payrolls release, came in better-than-expected. The US private sector created a net 227,000 jobs in October, comfortably above the 189k pencilled in, albeit there was a slight downward revision to the previous month. We think this bodes pretty well for tomorrow’s nonfarm number, expected to come in around the 190k mark.

Eurozone core inflation ticks higher, still well below target

In the Eurozone, investors largely overlooked yesterday morning’s inflation numbers, despite the data showing that core inflation ticked upwards in October. The core rate of consumer price growth edged up to 1.1% from 0.9%, although still remains comfortably short of target. The lack of reaction in the Euro to the better-than-expected news highlights the little bearing this upward move has on ECB monetary policy, given the crucial measure continues to print well short of the bank’s ‘close to, but below’ 2% target.

Euro traders will now turn their attention to tomorrow’s PMI data for October and Friday afternoon’s US labour report.