Sterling soars after EU’s Barnier opens door to softer Brexit

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30 August 2018

thomasdodds

The Pound jumped by around one percent in a matter of minutes against the US Dollar on Wednesday afternoon following comments from the EU’s chief negotiator Michel Barnier.

B
arnier eased fears that the UK could be heading towards a ‘hard Brexit’, in which the country retains no access to the European single market, signalling an accommodative stance towards Britain following recent negotiations. Investors took some heart when he stated that the EU was ‘prepared to offer a partnership with Britain such as has never been with any other third country’.

Further rhetoric from UK Brexit minister Raab yesterday afternoon also raised hopes that the UK could avoid a ‘no deal’ Brexit scenario. Raab stated that he was confident a deal was ‘within our sights’, and that there could be some leeway in reaching a deal at the October EU summit. These comments reaffirm our view that fears of a ‘no deal’ Brexit have been somewhat exaggerated and that a deal will be reached in either October or December, which should provide scope for a bounce back in the Pound.

Macroeconomic data continues to take a back seat in the UK, with all attention today to remain on Brexit developments.

US second quarter economic growth revised higher

Wednesday sharp drop off in the Pound was helped on its way by some more impressive economic data out of the US that continued to suggest the world’s largest economy was powering ahead of much of the developed world. Second quarter growth was revised upwards to 4.2% from 4.0% annualised, its highest level in almost four years. A boost from Donald Trump’s tax stimulus no doubt helped lift economic activity, and ensure that the US economy is now growing at more than double the pace than that of the UK during the same period. We do, however, think that growth is likely to ease in the second half of the year, as the effect of Trump’s stimulus begins to fade.

Spending and income data out this afternoon could shift the US Dollar today, although both are expected to come in mostly unchanged.

Barnier comments lift Euro, Lira resumes sell-off

Comments from Barnier on the possibility of a softer Brexit provided some impetus for a Euro rally, with the currency spending much of afternoon trading back above the 1.17 mark against the US Dollar. Domestic economic news was limited, however, with attention instead turning to this afternoon’s German CPI data.

Meanwhile, many emerging market currencies resumed their sell-off on Thursday, with another sharp decline in the Turkish Lira leading to a modest flight away from riskier currencies. The Lira dropped another three-and-a-half percent against the greenback after rating agency Moody’s downgraded 20 financial institutions in the country and warned that the worst was yet to come.