Sterling clings onto gains amid renewed Brexit optimism

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31 August 2018

thomasdodds

The Pound held steady above the 1.30 mark against the US Dollar this morning, with optimistic comments earlier in the week from both sides of the Brexit negotiations ensuring that the currency remains well supported.

T
he EU’s chief Brexit negotiator, Michel Barnier, raised hopes that an agreement would be reached with the UK before the March 2019 Brexit deadline in the past few days, saying that a ‘unprecedentedly close relationship’ would be offered. These comments were tempered somewhat yesterday, with Barnier claiming during a radio interview in Germany that the UK must also prepare for a ‘no deal’ Brexit.

As we mentioned this week, we think that fears that a deal will fail to be reached in time are somewhat overblown and the sell-off in the Pound excessive. Should a deal fail to be reached by the October EU summit, the prospect of an agreement at the December summit or at an emergency meeting in November ensures that we think a deal is more likely to be struck than not.

Britain’s Brexit secretary Dominic Raab will be meeting with Barnier today, with currency traders looking out for any potential headlines out of the talks that could shift the UK currency.

Investors brace for possible Italy credit rating downgrade

A disappointing set of inflation data out of Germany weighed somewhat on the Euro yesterday, while boding poorly for this morning’s Euro-wide CPI figures. Italy also remains a significant risk for the Euro at present, with Fitch set to update their rating for the country today. According to local reports, there is now a good chance that either the country’s rating or outlook could be downgraded amid plans by the new government to increase spending. Italy already has a very hefty debt-to-GDP ratio in excess of 130%, with further spending increases likely to ramp up stress on an already strained economy.

This morning’s Eurozone inflation numbers are expected to confirm that core inflation remained stuck at just 1.1% in August, well below target. A confirmation would reaffirm our view that the ECB remains a long way off from raising interest rates.

US Dollar rally eases amid unwinding safe-haven flows

The US Dollar managed to claw back some ground against its major peers during London trading yesterday, although remains comfortably lower over the past couple of weeks. Increased optimism over trade unwound safe-haven flows, particularly following the US-Mexico agreement earlier in the week. There is also speculation that a deal with Canada could be close.

With no major economic data releases on the docket in the US today, activity is likely to be dominated by trade announcements. Attention may also turn to next week’s nonfarm payrolls report, which is expected to show another healthy month of job creation and uptick in wage growth.