At the end of last week, optimism over a possible new Brexit deal saw the pound make gains. This week, sterling mostly continued to push higher, though the trajectory was a little less dramatic. The pound had its best two days percentage-wise since before the EU referendum in the latter half of last week.
Revived Brexit deal hopes pushed sterling to $1.25 on Friday following a 1.9% on Thursday. This week, the pound gathered momentum following the Queen’s Speech and the presentation of a new deal, including an alternative to the controversial Irish backstop that had proved such a sticking point. At the beginning of the week, the pound made gains of a quarter of a cent from both the euro and the US dollar.
Investors appeared to be pricing in another delay and pricing out a no-deal Brexit as the deal was presented to the EU. While there has been much greater optimism this week that has benefited the pound, there have been a few challenges along the way. On Tuesday, sterling led the field, adding an average of 1.3% but a Bloomberg report suggesting that a deal was impossible halted those gains midweek. As the crucial EU Summit began, the pound soared against the euro and dollar following statements from both UK Prime Minister Boris Johnson and European Commission President Jean-Claude Juncker that a Brexit deal has been agreed.
Optimism has not been unbridled, however. The DUP’s refusal to back the deal means that the PM may have similar challenges regarding parliamentary mathematics as his predecessor, and while it has been taking fewer headlines, the deal must also pass through the EU parliament before it can be agreed. While Brexit undoubtedly dominated investors’ thoughts, progress in the US-China trade war and a possible easing of tensions also proved positive for sterling.
In addition, GDP expanded by 0.3% in the three months to August. The NIESR estimated that the economy grew by 0.5% in the third quarter and that it will expand another 0.3% in Q4 and the CPI put inflation at 1.7%. much may depend on the outcome of the coming weekend; Bank of England Governor Mark Carney warned of the consequences of a no-deal Brexit for the UK economy, and while it had little impact on the pound this week, those words may come back to haunt sterling if the deal is not approved by parliament over the weekend.
Brexit progress also assisted the euro this week as the EUR/USD rate rose. Investors saw an easing of Brexit-related risks and the break above 1.11 meant that the euro had entered more bullish territory. The announcement of the deal solidified gains made earlier in the week and led to the exchange rate rising to 1.1117.
As enthusiasm for the Brexit deal swept the markets, ZEW’s surveys of economic sentiment in Germany and Euroland “recorded a very slight decrease” which did not affect the euro. The results had been largely expected, and there was similar apathy over the consumer price index data which put inflation at 0.3% in Italy and 0.8% in the euro zone. Today EU leaders will be discussing the EU budget – while much has been made of the positive aspects of reaching a departure deal with the UK, the next priority for the EU is to plug the gap in the budget created by the UK’s departure.
Clashes are expected – Britain was a net contributor and the current stance is that richer EU members are calling for budget cuts while others feel that contributions should increase from certain countries.
The budget for the 2021-2027 period is set to be key issue as the EU finally seeks to move on from negotiations with the UK and look to the future, and this is another issue that may influence the euro next week once the outcome of the meeting is made clear over the weekend.
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