Pound Sterling Today: Higher vs. Euro and Dollar, UK's Chief Trade Negotiator says UK Prepared for Australia-Style Trade Deal
- GBP perks up following labour market data
- Trade negotiations: UK says won't accept EU alignment demands
- Australia-style deal possible
- GBP/EUR could fall to 1.05 if no free-trade deal agreed
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- Spot rates at time of writing: GBP/EUR: 1.0808, -1.75% | GBP/USD: 1.1852, -2.15%
- Bank transfer rates (indicative): GBP/EUR: 1.0520-1.0596 | GBP/USD: 1.1537-1.1620
- Specialist money transfer rates (indicative): GBP/EUR 1.0650-1.0701 | GBP/USD: 1.1650-1.1745 >> More details
The British Pound is seen advancing the U.S. Dollar, Euro and other major currencies in the wake of some better than expected employment numbers out on Tuesday, but Brexit trade negotiation developments are being tipped by a number of analysts to keep the currency's rally in check.
Sterling was higher in the wake of data that showed the UK added 180K to its labour force in the three months to December 2019, which is more than the increase of 145K the market was looking for. This is however still below November's 208K but it must be remembered that hiring does tend to slowdown into the Christmas period. The claimant count meanwhile grew by 5.5K, well below the 22.5K the market was looking for.
The latest labour market statistics are consistent with expectations for pay to rise in 2020, which should convince the Bank of England to refrain from cutting interest rates; this should in turn keep the Pound supported.
"For each vacancy, on average there were 1.6 unemployed people for employers to choose from. At the height of the financial crisis, this ratio was closer to 6. Generally, these dynamics should put upward pressure on wages as firms compete for labour," says Nikesh Sawjani, UK Economist at Lloyds Bank. "This latest news is a reminder that even current levels of pay growth – in a tight labour market – are inconsistent with market expectations of a lower level of Bank Rate."
The Pound looks well supported against a host of currencies and remains one of 2020's better performers, particularly when we note that against the Euro the Pound continues to hover near multi-month highs. However, it does remain vulnerable to deeper pullbacks if UK data disappoints or the EU-UK trade negotiations show an obvious deterioration. With this in mind, tomorrow's inflation statistics and overnight developments in the EU-UK trade negotiation arena are notable.
While trade talks are yet to start, markets are digesting the opening positions being set out by the EU and UK. In particular, Sterling could be vulnerable over coming days to the EU's response to a speech delivered by the UK's chief Brexit negotiator, David Frost, in which he warned the the EU's demand that the UK follows their rules in exchange for a free-trade deal was unacceptable.
Delivering a lecture to a university in Brussels, Frost said the UK's desire to not be a rule-taker "isn’t a simple negotiating position which might move under pressure, it’s the point of the whole project."
The EU want the UK to submit to a swathe of rules that would ensure the UK does not become a competitor, arguing that because the UK is so integrated into the European economy a deal such as that given to Canada and South Korea would not be appropriate. Neither countries are subject to EU rules that govern labour markets, the environment and state aid while there are no dispute mechanisms that would be overseen by the European Court of Justice.
"We only want what other independent countries have," Frost said. He stressed the UK "will not extend the transition period beyond the end of this year... at that point we recover our political and economic independence in full – why would we want to postpone it?”
The UK will set out its negotiating position in more detail next week, according to Frost.
EU officials and leaders could well give their response to Frost's speech over the course of today and coming days, we would expect comments to ultimately dismiss Frost's demands and add to the combative atmosphere that will likely keep Sterling's wings clipped.
The Pound-to-Euro exchange rate is seen moving back above the key 1.20 level at the time of writing and the market looks to be defending 1.20 as a newfound level of support.
The Pound-to-Dollar exchange rate meanwhile trades back above 1.30 at 1.3040, we expect 1.30 to maintain its magnetic pull that attracts Sterling on forays either higher or lower.
The EU-UK trade negotiations are likely to form a key consideration for foreign exchange traders in 2020 and fears that the trade talks could collapse will likely create a premium on holding Sterling.
Therefore, the full upside potential in the Pound will likely be limited until a trade deal is finalised. Should talks fall apart then the Pound could well come under sustained selling pressures.
"An uncertain and potentially turbulent future awaits as UK-EU trade talks also get underway next month. It’s unclear whether sterling will hold on to these recent gains, particularly against the Euro," says George Vessey, Currency Strategist at Western Union.
EU countries are currently establishing a unified position that their negotiators at the European Commission must seek to achieve, with official negotiations only being expected to commence next month.
France is believed to be pushing a hawkish agenda, in which they demand the UK dynamically align to EU rules, i.e. when current EU rules change in the future, the UK adopts them.
This would leave the UK an effective rule taker and Frost says this would therefore compromise the country's sovereignty which is at the core of the Brexit project.
The fact is that the EU is the gatekeeper to its own market. It is under no duty to offer the same deal on the same terms as it has to other countries. The terms of access are its gift alone.
— James Crisp (@JamesCrisp6) February 17, 2020
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Jean-Yves Le Drian, the French foreign minister, said at the weekend that EU and UK negotiators were likely to rip each other apart, with the two sides expected to fight particularly hard over fishing rights.
Le Drian said yesterday at a security conference in Munich:
"I think that on trade issues or on the measures for our future relationship that we are going to discuss, we are going to start on, we are going to rip each other apart.
"But that is part of the negotiation. Everyone is going to defend their interests."
Frost told his audience that should the EU not agree to a free-trade agreement, the UK would not be afraid to seek an "Australia-style" free-trade agreement.
The EU does not have a free-trade agreement with Australia, and so such an arrangement would effectively be a trade relationship governed by World Trade Organization rules.
We would imagine Sterling would come under notable pressure if this was indeed the direction of travel for future EU-UK trade.
"We doubt the pound will rise much as long as there remains the possibility of the UK trading with the EU on WTO terms at the end of the year. Indeed, in that scenario, sterling could drop significantly, possibly to $1.15 (€1.05) or a bit below," says Thomas Pugh, an economist with Capital Economics.
