Pound Sterling Sinks v Euro & Dollar as Ratings Agencies warn on Economic Outlook Following General Election Result
- Pound to Euro exchange rate (13-6-17): 1 GBP = 1.1307 EUR
- Pound to Dollar exchange rate: 1 GBP = 1.2653 USD
Pound Sterling was seen under pressure at the start of the new week as two of the most influential ratings agencies announced recent political developments in the UK are negative for the outlook.
Moody’s and S&P both released briefings reflecting on the outcome of the previous week’s General Election that saw the Conservative party win by a small margin.
The Conservatives will now have to govern without a majority in Parliament that will see laws only pass the house with the support of Northern Ireland’s DUP.
The current political instability in Britain is likely to impact the country's economic
"For the time being, the outlook remains negative," says S&P economist Jean-Michel Six in Paris. "In terms of the outlook for growth, it's clear that things are not going in the right direction."
"This latest bit of instability can only weaken the business environment and consumer confidence," added Six.
Moody’s meanwhile reflect that the UK election result is seen as credit-negative for the UK.
Following last week’s vote where the Tory party lost its slim majority, Britain is likely to have minority Conservative-led government propped up by the Democratic Unionist Party of the Northern Ireland.
On Monday, Moody’s said the outcome had “hampered” the UK’s Brexit negotiations and would increase the threat to the country’s public finances.
This would be “negative for the UK’s credit profile”, said Kathrin Muehlbronner, senior vice president at Moody’s.
"This seems to have woken traders from their slumber and the pound is on the defensive as we start the week. It wouldn’t take much bad news from the UK political scene to force cable to take another leg lower. Still there is plenty of bid to catch on the way down as the dips are being viewed as short-term buying opportunities," says analyst Neil Wilson at ETX Capital.
Sentiment remains pretty bearish on Pound Sterling at present, "as Moody’s points out there is a chance of a softer Brexit but we must also think there is a heightened risk of a cliff-edge exit from the EU,” adds Wilson.
Moody's ranks the UK one notch above the other two main ratings agencies at Aa1.
However, there is a potential bright-spot concerning the outlook for Sterling in that the weakened stance of the Government could lead to a softer Brexit deal being reached.
“While it is unclear at this stage which changes to its strategy the government will contemplate, it may be that 'softer' versions of Brexit will now be considered. This could potentially include a request to remain inside the EU single market or the customs union," Moody's said.
Negotiations with the EU are due to officially kick off in Brussels next Monday, when the EU is likely to hand the government an exit bill that has been touted as high as €100bn.
Negotiations over the bill, citizen rights, and potential trade arrangements must be completed in two years. The tight timetable means it will be “imperative in our view for the government to secure an agreement for a transition period”, said Moody’s.
Despite hopes for a softer Brexit deal, the agency said it still believes “Brexit will happen” and the prospect of a no deal “cliff edge” after 2019 still remains.
The first signs political instability were having an impact on the economy were on Monday reported by the Institute of Directors whose first poll of business leaders since Thursday’s General Election reveals a dramatic drop in business confidence and huge concern over political uncertainty, and its impact on the UK economy.
Company directors see no clear way to quickly resolve the political situation, feeling that a further election this year would have a negative impact on the UK economy.
“It is hard to overstate what a dramatic impact the current political uncertainty is having on business leaders, and the consequences could – if not addressed immediately – be disastrous for the UK economy. The needs of business and discussion of the economy were largely absent from the campaign, but this crash in confidence shows how urgently that must change in the new Government,” says Stephen Martin, Director General of the Institute of Directors.
Leaning to a Softer Brexit
We find the most significant development concerning Pound Sterling at present is the idea that the UK could be header for a softer Brexit - i.e. one the could entail some kind of single-market access or customs union membership.
For the Pound, this is a positive if we consider the Pound to Euro exchange rate is now some 13% lower than where it was when the UK voted to leave Europe as markets discount the prospect of slower growth resulting from Brexit.
A 'softer' - we believe - is the UK staying within the single market and customs union.
Recent events have suggested that the a shift a softer Brexit is likely:
- The Conservative supply-and-demand deal with the DUP - we know the DUP is very keen to ensure Ireland doesn’t see border posts erected once more.
- Irish PM designate Leo Varadkar says he believes the UK is heading for a softer Brexit
- The Conservatives will rely heavily on the support of Scottish Conservative leader Ruth Davidson who delivered 13 seats in the election
- A report in the Evening Standard headlined Theresa May sidelined as Tory cabinet 'sensibles' plot soft Brexit is indicative of how the Conservative party itself is shifting
However, keep in mind that both Labour and Conservative manifestos have said the UK would be leaving the customs union and single market, we believe this talk of a softer Brexit is misguided at this point.
