Despite news of a major fine against Germany’s biggest lender, the EUR GBP exchange rate was able to trend bullishly thanks to Sterling weakness.
The Pound was weakened by the continued failed attempts by UK officials to engage their European counterparts in pre-Brexit talks.
Pound Flat ahead of Fed; Will Markets Respond Positively to Latest UK Borrowing Figures?
14.30, 21/09/2016: UK government borrowing data covering August revealed a deficit of over -10 billion. Compared to 2015’s -11.47 billion deficit the latest figures represent an -8% reduction, but the number is still high enough to have thrown targets into doubt. Focus on the Fed is keeping the Pound from responding to the data so far today.
EUR GBP Holds Opening Levels; Markets Frozen Ahead of Fed Announcement
08.45, 21/09/16: The Euro Pound exchange rate is, like most exchange rates today, frozen around opening levels. Traders across the globe are reluctant to adjust their positions before today’s meeting, which is expected to at least see the Federal Open Market Committee (FOMC) deliver clear signals that they intend to hike rates in December. A few outliers, including Barclays Plc and BNP Paribas, are sticking to their bullish calls for a surprise hike today.
Warning UK could Lose Financial Passporting Rights Fails to Weigh on GBP
Jens Weidmann, Chief of Bundesbank – Germany’s central bank – has warned that the UK could stand to lose its financial passporting rights in the event of a so-called ‘hard Brexit’. If the UK leaves the European Economic Area (EEA) the rights that allows firms based in the UK to operate across the EU without the need for individual licenses will be revoked. This would be a severe blow for the UK, as financial services are a huge contributor to economic output, but the Pound has so far remained resilient to trader uncertainty.
(Last updated 12.52, 19/09/2016)
Euro Falls as News of Deutsche Bank Fine Rattles Markets
Market confidence took a hit on Friday after it was announced that the US Department of Justice (DoJ) intended to fine Deustche Bank US$14 billion. The fine relates to the alleged mis-selling of mortgage backed securities during the build up to the 2008 financial crash. While the DoJ has a history of levying significantly larger fines than the settlement finally reached, the amount currently demanded would cause severe problems for Germany’s largest bank.
According to reporters from German newspaper Handelsblatt (via the Guardian);
‘Such a large sum would amount to a minor catastrophe: if the bank had to raise the fine out of its capital, it would shrink its equity ratio to single digits, perhaps eight percent. For a bank of this calibre and complexity, this would be unacceptable and would practically force a capital increase.’
The weak Euro was pressured lower by US Dollar strength, thanks to the inverse relationship between the two.
Pound (GBP) Slumps as EU Officials Reject Attempts to Hold Talks before Article 50
British officials have attempted to discuss the Brexit negotiations with EU officials, but news that they have been repeatedly rebuffed soured appetite for Sterling on Friday. The UK government wants to hold informal talks with EU leaders to discover their position going into negotiations. Of particular interest to the government is assessing attitudes towards the single market; ‘Brexiters’ claim that the UK can secure single market access without accepting free movement in return.
The Deutsche Bank fine was also worrying UK markets as investors were concerned that the Royal Bank of Scotland (RBS) could be another potential target for the Department of Justice.
EUR GBP Exchange Rate Forecast; UK House Prices in Focus
Only low-impact Eurozone current account and construction output data for July is set for release today and is unlikely to have a particularly strong influence on the EUR GBP exchange rate.
With today’s house price balance data having already been released, there is little on the calendar to further influence the Pound. In the unlikely event the Bank of England (BoE) reports it was unable to find enough bonds for the latest round of asset purchasing, GBP could plummet.