- Euro Pound Climbs to 0.8934 – Pound Euro Slides to 1.1192
- BoE Woods Scares Investors – Pound Tumbles
- S&P Sceptical of Need for UK Rate Hike – Euro Lead Cemented
The Euro Pound exchange rate climbed today on news that Bank of England (BoE) Chief Executive of the Prudential Regulation Authority (PRA) Sam Woods expressed worries that banks might start leaving if a Brexit transition deal isn’t effectively agreed upon by Christmas.
Woods stated at a speech in London:
‘I struggle to see an outcome in which banks and insurers do not get harder to supervise and harder to resolve for all involved. If we get to Christmas and the negotiations have not reached any agreement on this topic, diminishing marginal returns will kick in. Firms would start discounting the likelihood of a transition in the central case of their planning’.
Lacking a legally binding transition deal before the end of 2017, various banks in the UK will have to start applying for licences in Q1 2018 in order to allow for enough time for things to be processed.
Banks also require a year, if not more, to properly set up functioning branches and subsidiaries overseas in order to maintain uninterrupted EU activities.
In the eyes of the markets this adds another potential element of risk to the possibility of a ‘cliff-edge’ Brexit, making the Pound the less attractive option today and driving EUR GBP higher.
EUR Gains as S&P Reveals it is Sceptical that the UK is Ready for a Rate Hike
Another notable contributor to today’s drop in demand for the Pound has been a warning from the rating agency Standard and Poor’s, (S&P) who warned that the UK’s economy might not be strong enough to support a rate hike at this juncture.
The S&P argued that the BoE would struggle to justify a rate hike after the disappointing performance of recent business surveys, like Monday’s UK manufacturing PMI and Tuesday’s poor construction PMI.
In another somewhat surprising declaration the rating agency also claimed that the BoE was only talking about the concept of an imminent rate hike to prevent the Pound from sliding too far.
The S&P stated:
‘We remain a bit sceptical as to how justified such a hike would be in the near term. One rate rise may come in November, but further increases aren’t justifiable given Britain’s weak wage growth. Overall, we believe the Bank and Mark Carney’s recent statements are primarily aimed at propping up sterling to reduce imported inflation pressures’.
Despite Britain’s weak wage growth, however, inflation levels continue to accelerate significantly above the bank’s target, leaving the BoE stuck between something of a rock and a hard place.
GBP EUR Forecast: Euro Liable to Fall if Situation in Catalonia Worsens
Whilst the Euro currently remains ahead of the Pound, this could significantly change in the coming days depending on how the situation in Catalonia fares.
Markets are currently awaiting an announcement from the leader of Catalonia Carles Puigdemont, who stated following their independence referendum that Catalonia will declare its independence from Spain in ‘a matter of days’.
The Spanish government, however, will not officially acknowledge such a declaration, as they deemed the referendum to have taken place outside of the law.
If Puigdemont does indeed declare independence then Spain could decide to initiate Article 155, which would essentially give the government the legal means to take full control over the autonomous Catalonia.
Such an event would likely spook markets and drive EUR GBP lower, as instability within Spain could ultimately reflect as instability within the bloc itself.