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  • GBP performance as markets ponder 2018 Brexit outlook


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    The quiet Christmas period left markets to reflect on the impact of Brexit in the coming year. This saw the pound seesaw against the euro but ultimately weaken, although against the US dollar Sterling has been able to record steady gains.

    GBP/EUR has bounced back to around €1.1292 after sliding from €1.1360 to €1.1217 over the course of the past fortnight.

    GBP/USD has risen steadily from US$1.3431 to US$1.3609.

    While EUR/GBP has now fallen to its lowest level since Christmas Day at £0.8857, EUR/USD continues to trend around its highest levels in three years.

    What’s been happening?

    Thursday 21st December saw the release of UK consumer confidence data reveal a surprise fall in the sentiment index from -12 to -13; a four-year low.

    However, pound Sterling managed to hold ground versus the euro and US dollar, thanks to a smaller than expected widening of the UK public deficit, with net borrowing clocking in at £8.1 billion in November instead of the forecast £8.3 billion.

    The Christmas week was unsurprisingly empty in terms of ecostats, leaving markets to ponder the long-term outlook for the UK economy and the impact of Brexit.

    Think tank the Resolution Foundation warned on the 27th that wage growth was likely due to at best stagnate and at worst continue falling during 2018, but the pound recovered the following day after the Confederation of British Industry (CBI) reported that the UK economy had seen the fastest rise in businesses reporting increased output in two years.

    A disappointing Economic Bulletin from the European Central Bank on Thursday 28th failed to prevent GBP/EUR exchange rate losses; growth forecasts were positive, but inflation is predicted to remain soft.

    However, sentiment towards the euro became more positive again the following day thanks to above-forecast inflation data from Germany, returning the pound to euro exchange rate back to its weekly low.

    Meanwhile, the GBP/USD exchange rate has been able to steadily climb over the past fortnight.

    President Donald Trump’s tax reform bill was finally approved in the week before Christmas, but the US dollar failed to gain much support as markets have been buying USD on the hopes of changes to the tax system since a few days after Trump was inaugurated.

    Focus instead turned to the impact of Trump’s plans and whether or not they can actually deliver the economic benefits promised; some concerns remain that they will do more harm than good, which gave speculators even more incentive to realise their gains now rather than waiting.

    What do you need to look out for?

    The UK’s services PMI for December will round off the fourth quarter data from research company IHS Markit, allowing economists to gauge the progress of the UK economy in the final months of 2017 with more accuracy.

    A strong services reading could boost the pound, while a weakening of the index - even if the overall picture seems solid - could cause some jitters for Sterling.

    Eurozone consumer price index figures are set also set for release in early January; while core inflation is expected to have picked up from 0.9% to 1%, the euro may fail to benefit as the figure is still far away from the ECB target of just under 2%.

    The US dollar is likely to see notable volatility tonight, given that the Federal Open Market Committee (FOMC) will publish the minutes of its 13th December policy meeting.

    Should the minutes show that policymakers are feeling cautious about the outlook for the US economy, the US dollar could weaken, while signs that the Fed is upbeat in its economic outlook will boost USD.

    Volatility could continue into the weekend, as Friday sees the release of the highly influential non-farm payrolls report for December. Strength here would further firm the case for another rate hike from the Federal Reserve in the near-term.



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