Pound Sterling Strengthens Vs Euro and Dollar As EU Summit Wraps Up On a Positive Note

Friday's boost to the Pound comes closely on the heels of a sluice of bad news for the UK economy, which has recently seen consumer spending fall and the outlook for consumer credit deteriorate further.

The Pound rose strongly throughout the morning session Friday as October's European Council summit looked set to conclude on a positive note.

Comments from German Chancellor Angela Merkel, Prime Minister Theresa May and a host of other officials were behind the lift, all of which seemed to suggest Brexit negotiations may soon move forward onto the subjects of trade and transition.

“My impression is that these talks are moving forward step by step,” Merkel told reporters. “From my side there are no indications at all that we won’t succeed.”

Markets have feared a possible delay to the progression of talks on to the subject of trade beyond December.

PM May reiterated her Florence promise that the EU will not suffer a budgetary black hole during the current spending period, as a result of Brexit, which runs into 2020.

“There is still some ways to go on Brexit,” says Theresa May. “I am ambitious and positive about the Brexit negotiations.” She also reiterated that the UK will “honour our commitments.”

Any delay of trade or transition talks beyond December is seen as raising the risk of a so called “hard Brexit”, or a “no deal Brexit”, given the time it is likely to take to agree details of a “transition deal” as well as the future relationship.

The PM’s statements on Brexit came closely on the heels of public sector net borrowing data that showed UK government borrowing rising to £5.3 billion in September, up from £5.1 billion the previous month.

Despite a rise in the headline measure, the latest borrowing figure was the lowest of any September month for a decade.

The Pound-to-Euro rate had risen 0.43% to 1.1145 a short time ahead of noon while the Pound-to-Dollar rate added 0.08% to 1.3159, making Sterling the best performer against the greenback out of the G10 basket.

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Consumer and Credit Outlook Clouds Further

On Thursday, Office for National Statistics data showed retail sales falling sharply by -0.8% in September, much further than the -0.1% decline pencilled in by forecasters.

Despite this, economists still see consumer spending as having stabilised during the third quarter and are also predicting a steady performance from the economy during the period.

However, with inflation pressures already dampening spending, the outlook for consumers and credit supply to households appeared to darken further on Thursday.

"UK household debt levels are high and still growing," says Annabel Schaafsma, head of Moody's EMEA consumer surveillance team. "As real income declines, UK consumers are vulnerable to an economic downturn and any increases in inflation or interest rates could cause problems for household finances, especially for those on lower incomes."

Moody’s, the ratings agency, said the faltering outlook for the UK consumer will have an impact on credit providers who support their business using the securitisation market.

"Additionally, consumer credit has been growing in excess of the rate of household income. This suggests we will see a weakening future performance of some UK consumer securitisation deals," says Schaafsma.

Securitisations are an important source of liquidity for banks of all sizes and also for some corporates. Even mobile phone contracts can be securitized and sold on to investors, unlocking capital and providing an instant return for originators. 

However, investor demand for UK securitization deals looks set to weaken, particularly in the mortgage market.

“Moody's expects higher delinquencies in newer, non-conforming RMBS, as opposed to older, more seasoned deals. The borrowers in newer deals are more likely to be paying higher interest rates and have a smaller safety net. Buy-to-let RMBS is very sensitive to a weaker economy and occupancy rates and rents are expected to decline,” the ratings agency says in a statement.

Bank of England Credit Survey Points To Tighter Supply 

Thursday's Moody’s report came barely a week after Bank of England data showed default rates on credit cards and other types of unsecured loans rose during the third quarter.

Recent BoE changes to bank capital requirements for different types of consumer loans had been expected to slow the pace of lending to households during the months ahead.

But a rise in default rates over the third quarter looks as if it might accelerate the pace at which banks now cut back lending to consumers.

“Default rates on credit card lending were reported to have increased slightly in Q3, while those on other unsecured lending increased significantly,” the Bank of England says, in its latest quarterly Credit Conditions survey. “Lenders reported that the availability of unsecured credit to households decreased in Q3 and expected a significant decrease in Q4.”

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