The Pound Looks to End Month on a High Amidst Reports Brexit Negotiations are Heading for "a Deal of Some Description"
Image © European Union 2018 - European Parliament, Reproduced Under CC Licensing.
- Sources say Brexit deal "of some description likely"
- But markets likely to sell any Sterling strength
- Pound-to-Euro exchange rate @ 1.1265 today, Pound-to-Dollar rate @ 1.2745
The British Pound has seen a decisive swing of fortunes at month-end, going from the dog of the market on Tuesday to the day's best performer in the mid-week session.
Brexit sentiment remains the driving force behind the currency and the latest news concerning Brexit that we have picked up on does appear to be constructive from Sterling's point of view.
The BBC's political editor Laura Kuenssberg reports her sources as saying it remains "too early" to tell if there is a way of putting together a deal that will be approved by Prime Minister Theresa May's Cabinet.
However, she says May's lead Brexit aide Olly Robbins has been "back and forth" to Brussels, "hoping to get talks back officially soon but right now no landing zone."
The E.U. and U.K. are said to be "exploring again" the same issues of contention, "they are trying to put the same ingredients together to make something that’s politically different and palatable in U.K.," says Kuenssberg.
And, the good news for those wanting a stronger Pound is, "main expectation on both sides still appears to be that there will be a deal of some description."
When the pendulum swings back to a deal being possible, the Pound edges higher. "The Pound’s value continues to serve as a barometer of market confidence in Britain and the E.U. reaching a timely deal on the former’s exit from the bloc in March," says analyst Joe Manimbo with Western Union.
The Pound-to-Euro exchange rate is trading 0.66% higher on the day at 1.2740 and will likely record its largest one day gain since October 05 if the advance is maintained into the day's close. Indeed, data presently shows the move in GBP/EUR is 132% of its daily average.
The Pound-to-Dollar exchange rate is quoted at 1.2754, against the Dollar it will take a great deal more work - consecutive days of gains - to convince us that a floor to the October sell-off has run its course.
"Many have been caught off guard by a round of outperformance in the Pound on Wednesday, though we have started to see some demand creep back, with the technical outlook arguing for strong support into this dip and medium-term players feeling better about some of the optimism out from the budget earlier this week," says Joel Kruger, a currency strategist with LMAX Exchange.
Beware the Limited Lifespan of any Sterling Strength
While Sterling is performing well short-term, and the likes of LMAX Exchange's Kruger see value in buying Sterling at current levels, we are wary that until a game-changer in Brexit negotiations materialises the currency will be subject to ongoing downside pressure.
We expect investors to see any bounces in the currency as an opportunity to sell into, allowing them to book profits when the broader and more established trend lower continues.
Investors, corporates and speculators are all meanwhile said to be buying options on the currency markets that will deliver a positive return in the event of a sudden and deep drop in Sterling during the December period; when the very last chance to secure a Brexit deal falls.
This is not merely speculative activity; importers will also be buying these options in order to allow them to maintain purchasing power in the event in a slump in Sterling.
"Brexit agreement over safeguarding against a hard border for Northern Ireland is proving elusive. It is impossible to see how, without that, a Withdrawal Agreement will be reached. For businesses, the longer the delay, the greater the uncertainty," says Brian Martin, Senior International Economist with ANZ Bank in London.
Buying protection against a fall in Sterling is in turn pushing the current value of Sterling lower. So while there is no panic, the market is quietly keeping Sterling under pressure as traders look to avoid any negative consequences of a deep decline in the future.
ANZ are forecasting the Pound-to-Euro exchange rate to end 2018 at 1.0870. They are forecasting the Pound-to-Dollar exchange rate to end 2019 at 1.38.
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