- GBP Update – George Osborne scraps plans for 202o budget surplus due to ‘Brexit’ shocks
- Market confidence returns – Sterling continues recovery despite recession warnings
- ECB sees no need for stimulus – Brexit not causing instability, officials state
- Tensions rise over single market access – Multiple EU officials refute idea of single market access without free movement
- EUR GBP Forecast – German unemployment rate and Eurozone CPI could move Euro
GBP Fall Continues as Osborne Officially Scraps Austerity Targets
George Osborne is no longer aiming to return government finances to surplus by 2020, he has announced. The Chancellor’s plan to create a £10 billion surplus within the next four years has been the focus of much debate and criticism. Osborne overshot his targets by -£2 billion last year and has said that what is needed now in response to the ‘Brexit’ is ‘flexibility’. Many analysts have responded to his announcement by pointing out that he was unlikely to succeed in his objectives anyway.
Meanwhile, Conservative party leadership candidate Michael Gove has promised an extra £100 million will be spent on the NHS by 2020 if he wins the contest and therefore becomes Prime Minister.
In other UK news, the UK’s Manufacturing PMI rallied to a five-month high before the EU referendum, although the result had little effect in light of the fact analysts are expecting a reversal of the situation now Britain has voted to Brexit.
The recent market panic continued to abate on Wednesday, causing the Euro (EUR) to plummet against a recovering Pound (GBP). Warnings that Brexit uncertainty was far from over fell on largely deaf ears, even as multiple warnings over the UK economy poured in from economists and financial institutions.
By Thursday the Pound had stabilised against the Euro, adopting a slightly stronger position against its European peer than previously.
That being said, the Euro/Pound exchange rate remains considerably stronger than it was this time last week as the UK public took to the polls to vote in the EU referendum.
At that point in time, the latest polls and bookies odds indicated that the UK would vote to remain in the European Union.
The EUR/GBP exchange rate dropped -0.2% to hit a low of 0.8245.
Rising Market Confidence Causes EUR GBP Slump on High Risk Demand
A feeling that the post-Brexit vote sell-off was overdone saw market confidence strengthen further yesterday, driving up demand for riskier assets. This weakened the Euro, with safe-haven demand on the decline, although lessening fears of ‘Brexit’ fallout helped the Euro to recover some ground against the Canadian Dollar (CAD), the Swiss Franc (CHF), Japanese Yen (JPY) and the US Dollar (USD).
Rumours that the European Central Bank (ECB) did not see the need for additional stimulus measures in response to the UK’s vote to leave the European Union helped marginally improve investor sentiment. An unnamed source told Reuters that;
‘This is a political problem not a monetary phenomenon. We could act, we have the tools, but that would not solve the broader problem and for now, every estimate about the actual impact of Brexit is nothing but guesswork.’
The ECB’s Vitor Constancio further reinforced this idea in a speech yesterday, suggesting the Governing Council’s stimulus measures had helped keep the markets stable as he observed;
‘We saw no problem of liquidity pressures anywhere…no fragmentation in [Eurozone] sovereign bond markets. Markets worked, prices were formed…everything worked. Banks have no problems of liquidity.’
On the domestic data front, German consumer confidence rose unexpectedly in the latest reading, although Eurozone confidence measures either ticked lower or remained in negative territory. The German Consumer Price Index showed a greater slowdown in inflation on the month than had been expected, with price growth dropping from 0.3% to 0.1%, while the annual figure accelerated to 0.3% as expected.
Pound Euro (GBP EUR) Makes Strong Recovery despite Tensions over Single Market Access
The Pound remained oblivious to a score of developments that each would usually have pushed the UK unit into a bearish decline on a normal day of trading. Correctional trading after the Pound found resistance on Tuesday meant that Sterling experienced another bullish trend.
This was despite numerous forecasts that the country was heading for a recession as a result of Friday’s Brexit vote. JP Morgan even predicted that the Bank of England (BoE) would be forced to cut interest rates to 0.25% before the year was over.
One of the headline stories was the continuing tensions over whether or not the UK would be able to access the single market. Multiple UK officials, including prospective candidates for the role of Prime Minister Boris Johnson and Stephen Crabb, have expressed an intention to retain single market access without accepting full freedom of movement in return. David Cameron has acknowledged that achieving this will be a challenge for his successor, but that it is what many in the UK will be pressing for. According to one government source who spoke to the Telegraph;
‘[Mr Cameron] believes many in the UK do want a close economic relationship with the EU. If the EU wants a close economic relationship with the UK, then that does mean you are going to have to work out how do you address the issue of freedom of movement as part of that negotiation.’
However, this is at odds with the stance taken by EU officials, including Angela Merkel, Donald Tusk, Jean-Claude Juncker and Francois Hollande, who have claimed the UK cannot expect to enjoy the benefits of free trade without also accepting free movement. Hollande commented that if the British ‘don’t want free movement, they won’t have access to the single market.’
Euro Pound (GBP EUR) Exchange Rate Forecast: Further Brexit Fallout to Distract from Domestic Data
The pace of post-referendum forecasts, warnings and tension is unlikely to slow any time soon, meaning today could be as busy as yesterday for Brexit news. This could provide headwinds that finally scupper the Pound’s recovery – which many analysts have referred to as a ‘dead cat bounce’, meaning it will not continue in the long run.
High impact German unemployment data is set for release today, as are Eurozone inflation figures. If today continues along the theme of yesterday, the data may find a gap in the Brexit storm in which to spark movement for the EUR GBP exchange rate. Should investors grow jittery again, however, the data could find itself overlooked.
Finalised UK GDP figures for 2016 Q1 are also set for release today, although as they show what the UK looked like before the population voted for a paradigm-changing split from the EU, the data may be of little use until a few months down the line when it can be used as a reference.
EUR GBP Conversion Rates
Towards the end of the European session yesterday the Euro Pound (EUR GBP) exchange rate was trending between 0.8204 and 0.8321, while the Pound Euro (GBP EUR) exchange rate traded in the region of 1.200 and 1.2186.