British Pound Creeps Higher Vs Euro and Dollar Ahead of Festive Break: Market Reacts to Tax Cuts, Economic Data, Catalan Election

Scope for Pound-to-Euro to push higher next week now EUR/USD has topped out, Catalan election result is weighing and Sterling is supported by data.

The Pound had crept a fraction higher against the Euro and US Dollar by the London close Friday, following the release of several key economic reports from the UK, the latest developments in Catalonia's independence push and the signing by President Trump of the much vaunted and now-panned tax-reform bill.

Britain’s current account deficit narrowed to -£22.8 billion during the three months to the end of September, according to the Office for National Statistics, which is down from -£23.2 billion previously. Economists had hoped for a slightly larger fall to -£21.5 billion.

Separately, economic growth was confirmed at 0.4%, which is up from the 0.3% seen in the first two quarters but still below that achieved in prior years.

Business investment grew faster than was previously thought during the quarter, rising by 0.5% as opposed to the 0.2% growth revealed by the earlier figures released in November.

The Pound was quoted 0.06% higher at 1.3386 against the Dollar mid-way through the noon session, while the Pound-to-Euro rate was marked 0.05% higher at 1.1291.

Friday's ONS reports come closely on the heels of December's Lloyds Business Barometer, which showed confidence among UK companies rising 4 points to a five month high of 28%.

President Trump signed the eagerly awaited, but now-panned, tax-reform bill Friday although it will not be enacted into law until early in the New Year.

.@POTUS delivers. Tax cuts signed. Economy booming. America winning again! pic.twitter.com/cAxEjI9bRR

— Sarah Sanders (@PressSec) December 22, 2017

Once vaunted as an economic boon and a tailwind for the Dollar, economists have turned sour on bill, suggesting its boost to growth will be minimal and impact on the Dollar negligible.

It will, however, add substantially to the US deficit over the next ten years - according to most estimates.

After rising steadily throughout the second half, as the bill made its way to and through Congress, the Dollar has weakened ever since the reforms made the final leg of the legislative process. 

The Dollar was also weak Friday, helping to lift the Pound-to-Dollar rate by a touch through most of the session, although it was quoted only 0.01% higher at 1.3377 at the close. 

Above: Pound-to-Dollar rate shown at hourly intervals.

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The Euro also spent much of the Friday session on the back foot, with the Euro-to-Dollar rate marked 0.02% lower at 1.1851 around the London close, which helped keep the Pound-to-Euro rate steady during the session.

It begun the Friday session weaker after having taken a knock overnight in response to the outcome of the regional election in Catalonia.

Against all of the odds indicated by opinion polls, the separatists have returned to power in the province, threatening a renewed confrontation with Madrid.

The vote was a de facto rerun of the October referendum. The Spanish government had hoped a “silent majority” would prevail in the vote and reject the idea of a separation with Madrid.

Turnout in the snap vote was 81.95%, a substantial number, with the separatists claiming a total of 70 seats in the 135 seat parliament.

Support for Partido Popular, which leads the Spanish government in Madrid and has been the loudest of voices to advocate Catalan-Spanish unity, slumped.

It won just three seats in the regional parliament, down from the 11 it held before the vote - and at the time of Madrid’s crackdown on the region’s separatists ahead of the October referendum.

“With a historical participation of 81.95%, the fable of the silent unionist again refuses. Independence has once again won,” says Jaume Clomet, a spokesperson for the Catalan government, in a Twitter post.

“I very much doubt that these losses will turn out to be sustainable,” says Thu Lan Nguyen, a strategist at Commerzbank.

“Yes, the separatists defended their majority in the regional parliament, so that the tensions between Madrid and Barcelona are likely to continue. But the market kept its cool when the conflict last escalated and the euro remained relatively unaffected, and so it would come as a big surprise to me if that were to change now.”

There may be some scope for Pound-to-Euro to push higher over the course of the festive week, given the EUR/USD topped out close to a key resistance level at 1.1880 Thursday, after several days of gains.

Markets can set Pound-to-Euro prices independently of other rates but, as a foreign exchange cross-rate, GBP/EUR is at heart the product of a simple equation that divides GBP/USD over the EUR/USD price.

These are the underlying mechanics of the market and so, when the prices set by independent order books deviate away from the output of the above equation, any discrepancy is quickly arbitraged away.

Therefore, if the Pound-to-Dollar rate can hold its own over coming days, while the EUR/USD price remains under pressure, Pound-to-Euro should benefit.

The Pound-to-Euro rate was quoted 0.01% higher at 1.1286 around the London close Friday.

Above: Pound-to-Euro shown at hourly intervals.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.

UK Consumer Outlook Clouds into Year-end

The discussion around retailers and the economy is noisy and the outlook clouded going into year end, with conflicting signals coming from various indicators of consumer spending in recent weeks.

Thursday saw the GfK measure of consumer confidence sink one point to a fresh four-year low of -13 for December.

“It has been a slipping and sliding year. The Overall Index Score has slipped from - 7 in January to -13 in December – and not a single positive score in between,” says Joe Staton, head of market dynamics at GfK.

In fairness, the GfK consumer confidence measure hasn’t posted a positive score for more than two years despite the economy having enjoyed its strongest post-crisis expansion in 2015, while also holding up well throughout 2016.

An overwhelming majority of that growth was powered by consumer spending, which has held up reasonably well of late, according to official measures of output.

National accounts data released Friday showed consumer spending rising at a rate of 0.5% during the three months to the end of September, up from the 0.2% growth seen in the second quarter.

Last week Office for National Statistics data showed consumer spending rising by 1.1% in November, when compared with the month before, while annual growth was close to 2%.

These numbers were far ahead of the consensus for more muted month-on-month growth of 0.4%, and largely the result of Black Friday promotions.

However, some have begun to suggest consumer spending might moderate a touch during December and subsequent months. Wednesday's Confederation of British Industry Distributive Trades survey is the latest example.

“Retail sales volumes saw a second month of growth in the year to December, but this disappointed expectations of stronger growth. Sales are expected to rise at a similar pace in the year to January,” the CBI wrote in its report Wednesday.

The Distributive Trades survey polls 109 firms, 56 of which are retailers, who account for more than a third of all employment in the retail sector. It asks firms to state whether sales have risen or fallen and how actual results have compared with expectations.

“37% of retailers said that sales volumes were up in December on a year ago, whilst 17% said they were down, giving a balance of +20%. Growth was slower than expected (+30%), and slightly slower than in November (+26%),” the CBI said Wednesday.

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May Delays while Barnier Puts End Date on Transition and Softens on Trade

European Commission negotiator Michel Barnier laid out the Commission’s draft guidelines for the next phase of Brexit negotiations Wednesday, building on those issued by the European Council last Friday.

Much of the draft statement was a reiteration of the details given by the Council Friday but Barnier did say that any “transition” period would need to come to and end on December 31 2020, at the same time as the current European Union budget comes to an end.

The statements also cast fresh light over the scope for deadlock in talks to emerge once into the New Year, with Brussels insisting that the future relationship can only be agreed in outline before the UK enters transition, with the bulk of a final deal to be struck after March 2019.

The withdrawal agreement, entitling the EU to substantial payments and bestowing various other obligations on the UK, must be legislated for ahead of the UK’s departure. Bariner also threw down another hurdle to the UK government.

“Legally speaking, mechanically, the day after the U.K. has left the EU institutions, the U.K. will no longer be covered by our international agreements,” he said at a press conference. “They will be leaving approximately 750 agreements, which we have signed.”

If proven to be correct then this, combined with third country status in transition, could become a stumbling block for the government if it folds on its earlier demand the UK be able to strike trade deals while in “transition”.

Any constraint on being able to enter into deals before the transition ends could mean the UK is unable to renew and therefore, temporarily excluded from, the existing trade agreements the EU has with other countries.

That said, the documents released Wednesday bore signs of a possible softening in Brussels stance on this point.

“Where it is in the interest of the Union, the Union may consider whether and how arrangements can be agreed that would maintain the effects of the agreements as regards the United Kingdom during the transition period,” the draft documents say.

Separately on Wednesday, the UK government folded to opposition MPs and rebels within the Conservatives’ own ranks when it agreed another amendment to the European Union Withdrawal Bill.

This latest amendment allows UK lawmakers to defer the date at which the UK leaves the European Union, scuppering the government’s attempt to place a firm departure date into law.

It follows another amendment that gave parliament the power to reject the final Brexit deal negotiated by PM May and her ministers, effectively delaying the UK’s departure while another attempt at negotiation is made.

“Recent developments in the Brexit negotiations continue to support our view that the UK is ultimately headed for a softer Brexit. This is likely to provide ever more support to our constructive view on sterling which we have expressed through higher GBP/CHF,” says Kamal Sharma, a strategist at Bank of America Merrill Lynch.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.