We have had numerous factors that were positive for the UK economy over the last few days. Nissan pledged to build several new models in the UK, a new runway at Heathrow has moved a step closer and GDP data came in better than expected. These factors would usually have influence on Sterling but the uncertainty surrounding trade negotiations, labour and inflation have put a halt to any Sterling rally.
GDP was up by 0.2% and this would usually cause a Spike for the pound, but if we look at GBP/EUR there was a rise of around 40 pips and GBP/EUR quickly fell back below 1.12. With the other factors stated above as catalyst the pound should have moved significantly higher. This is a worry. Investor confidence is clearly low.
The CETA deal between Canada and the EU should be approved tomorrow, but it does not bode well for UK negotiations if the CETA deal seven years in the works was nearly scuppered by a small region in Belgium. A soft Brexit would be the sensible option, but Jean Claude Junker and Francois Hollande have mad it clear negotiations will not take place until article 50 is triggered. I think in order for Sterling to rally article 50 must be invoked and negotiations must be quick and decisive. Don’t hold your breath.
Currency Pairings in Detail
The greenback is currently is at a 31yr high. The last time rates were this good for dollar sellers Duran Duran were number one and Back to the Future was top of the box office. Although sellers may be tempted, there is the possibility of further gains. If Clinton gets in (factored into the market to some extent) the dollar will strengthen but perhaps which could cause more strength would be a rate hike in December which is highly probable. Add in the Brexit problems and we could be below 1.20 shortly.
Short to medium term the pound could have further losses, many analysts are predicting as low as 1.05 in December. This could we ll be the case, but the Euro has some serious problems which could cause substantial weakness for the Euro. Italian Bank’s bad loans totaling €360bn, the threat of further referendums, Greece’s debt crisis and the seemingly impossible task of stimulating inflation.
Aussie sellers are now at a three year high. Australian Dollar strength is causing a problem for the RBA however. It is putting the Chinese off Australia’s raw materials and they may seek a cheaper option. This problem would usually be solved by dropping interest rates to weaken the currency , but rates were cut recently and did little to weaken the Aussie. With the RBA seemingly powerless to weaken the Aussie expect the pound to fall further.
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