British Pound Rises Against Dollar, Slips to Euro; Greenback on the Back Foot as 2017 Comes to a Close

Modified: Thursday, 28 December 2017 17:17 GMT
Written by: James Skinner

Pound Sterling on front foot in final week of 2017. Economic and political news flow is thin but there’s scope for low volumes to exaggerate moves in FX.

The Pound had risen against the Dollar but slipped in the face of a strengthening Euro by the London close Thursday, amid low volumes and thin news-flow ahead of the year-end.

A weak Dollar was the biggest driver behind price action Thursday, helping the Pound to forge ahead, taking it back above the 1.3400 handle for the first time since early December.

However, the Sterling’s continental rival, the Euro, outpaced the British currency in its advance against the Dollar which helped put the Pound-to-Euro rate under renewed pressure - reversing gains notched up during the morning session.

A sharp fall in consumer confidence Wednesday, albeit from a reasonably high level, and a drop in long term US bond yields may have been behind the Dollar's latest decline.

“The pound has also been taking advantage of, not only the softer dollar, but also the lack of Brexit headlines, allowing it to crack $1.34,” says Jasper Lawler, head of research at London Capital Group.

“Fundamentals were also supporting pound strength moving into Thursday, as business growth picked up at its fastest pace since 2015. The CBI data boosted hopes that the UK economy could finally be rebounding, helping sterling move higher.”

The Confederation of British Industry Growth Indicator rose to +19 in December, up from a year-long low of +6 in November, as all sectors enjoyed a boost ahead of the festive period.

Thursday's survey polled 642 businesses across distribution, manufacturing and services asking them to rate current levels of activity and expectations for trading once into the New Year.

On the downside, the forward looking segment of the survey shows sentiment among CBI members taking another southward turn once into the New Year as the inflation squeeze continues to pressure household budgets and firms continue to fear the uncertainty around Brexit.

“Sterling was also supported by the rally in U.K. stocks. The FTSE 100 climbed to a fresh record high on light holiday trade,” says Kathy Lien, a managing director of foreign exchange strategy at BK Asset Management.

Britain's Premier League of listed companies, the FTSE 100, rose to a fresh record high during Wednesday trading. The index closed at 7,630 for the recent session, up 6.7% for the 2017 year to date.

“On a technical basis, GBP/USD is still range bound and while today's move took the pair to a 1 week high, the lack of continuation undermines the significance of the attempted breakout.”

The Pound was quoted 0.33% higher at 1.3448 against the Dollar Thursday while the Pound-to-Euro rate was marked 0.10% lower at 1.1247. The Euro-to-Dollar rate was quoted 0.45% higher at 1.1954.

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

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Brexit: Where Are We?

European negotiator Michel Barnier laid out the Commission’s draft guidelines for the next phase of Brexit negotiations Wednesday, 20 December, building on those issued by the European Council the Friday previously.

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 last week 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 document says.

Separately, but also last 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.

BAML's Sharma is not alone in flagging a "soft Brexit" as likely as the "softest of all possible Brexits" was also forecast recently by strategists at BMO Capital Markets.

Another round of Brexit talks will begin in January, the focus of which will be a deal concerning transition to the new relationship.

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, 21 December, 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, 22 December, 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.

The previous 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 20'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 on Wednesday, 20 December.

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.