The Pound Euro exchange rate acted in defiance of forecasts today and jumped following Prime Minister Theresa May’s speech about Brexit.
Sterling advanced across the board, climbing by over 1% against all of the majors (and over 2% against the US Dollar) despite May confirming that the UK would be giving up access to the single market in favour of tighter immigration controls.
Key takeaways from her speech included the government’s intention to pursue free trade with the EU and the fact that parliament would be given the chance to vote on a final deal.
After the speech the GBP EUR exchange rate climbed to 1.1537, up from a low of 1.1338.
Lloyds Bank stated; ‘Overall, the thrust of Theresa May’s speech confirmed that a ‘clean’ exit from the EU will be pursued, as by now widely expected. The immediate market reaction – which saw GBPUSD rally from 1.2170 to 1.2330 and gilt yields rise back above 1.32% – seems hard to justify in terms of new information, just as converse episodes of currency weakness around government hints of a ‘hard’ or ‘clean’ exit seemed exaggerated given the already-trailed direction of travel. Having set out the UK’s negotiating aims, and despite weaving in both appeals to economic rationality and thinly-veiled threats in her speech, how negotiations progress and what endpoint is eventually achieved will not be solely in the UK’s gift. While the aspiration is for an orderly departure, the key risk that remains is that the multifaceted aspects of both the exit terms and the contours of a new agreement are not agreed in time. Should a vote on any new deal fail to be passed in parliament, there remains the risk of an election earlier than the current timetable of May 2020.’
[Previously updated 12:00 17/01/2017]
With UK PM Theresa May due to deliver a speech on the government’s Brexit negotiation plans today, extensive Pound Euro exchange rate movement is expected.
The GBP EUR pairing was trending in the region of 1.137- as markets opened on Tuesday, with the expectation that May will outline a hard Brexit having the potential to send Sterling to new worst levels in the hours ahead.
However, as such an outcome has already been priced in to a certain extent, is there really much further for the Pound to fall?
According to currency analyst Josh Ferry Woodard, the Pound’s slight recovery on Monday afternoon had several motivations behind it:
‘The IMF upgraded its forecasts for UK economic growth in 2017 from 1.1% to 1.5%, citing a better-than-anticipated performance in the second half of last year as reason to expect solid growth again this time out. However, this had little impact on the Sterling exchange rate and it was comments from a Downing Street spokesperson that alleviated the pressure on the Pound. The government source told reporters that the tone of recent newspaper articles, in which it was assumed that Prime Minister Theresa May was ready to give up access to the single market, was merely ‘speculation’.
We’ll soon find out whether it was in fact speculation or whether Theresa May really intends to forego access to the single market.
The Pound continued climbing ahead of her speech as the UK Consumer Price Index was shown to have increased. Inflation rose by 0.5% on the month and 1.6% on the year.
[Previously updated 17/01/2017]
On Monday the Pound Euro exchange rate extended recent losses – plummeting all the way to 1.12 as markets reopened after the weekend.
The Pound US Dollar exchange rate was similarly softened, with the British currency sliding to a new over 30 year low.
Barring the flash crash of October, the Pound was trading at some of its worst levels since the UK voted to break from the EU in June 2016.
GBP EUR Exchange Rate Reacts Dramatically to Hard Brexit Fears
The belief that Theresa May will pursue tighter immigration controls over single market access is the driving force behind the latest spate of Pound Euro losses, and the pairing has so far failed to benefit from several positive UK data releases – like the recent run of better-than-projected PMIs for Manufacturing, Construction and Services.
A report on Sky News noted; ‘Several Sunday newspapers reported that Mrs May will say the UK is prepared to leave the single market, customs union and European Court of Justice in her speech at Lancaster House on Tuesday.’
According to Head Trader Adam Solomon; ‘The Pound has plummeted to new depths this morning, falling below 1.20 versus the US Dollar for the first time since 1985 and hitting lows below 1.13 against the Euro.
It’s a similar story versus all of the major currencies, with the Pound down to 1.6020 versus the Australian Dollar and falling below 1.60 against the Canadian Dollar. These dramatic moves are being driven by concern over the Prime Minister Theresa May’s speech on Brexit tomorrow. So far, May has been pretty emphatic with her desire to gain greater border control and prioritise immigration over maintaining a free trade deal with the EU. Further indications tomorrow that the UK will hurtle towards “hard” Brexit would likely push the Pound even lower than the current levels, leaving many to wonder exactly how far it could fall.’
The across-the-board losses seen in Pound Sterling exchange rates occurred even as President Elect Donald Trump offered further reassurances about the trade agreement the UK will forge with the US post-Brexit.
Trump has previously intimated that the UK would be at the front of the queue when it comes to forging new trade relations during his presidency.
Could the Pound Drop to Parity Against the Euro in 2017?
If May’s speech does contain any references to forgoing single market access, the odds of the Pound Euro (GBP EUR) exchange rate falling lower still are high.
Solomon continued; ‘Many big banks forecast last year that the Pound could fall to parity with the Euro and 1.10 versus the U.S Dollar. The Supreme Court will also rule this month on whether the government or Parliament carries the power to invoke Article 50 of the Lisbon treaty to begin formal proceedings in leaving the EU. The Sunday Times reported yesterday that May will withdraw from the free trade agreement in return for freedom to curb immigration and strike commercial deals with other countries. Government officials said they expected May’s speech to cause further “market correction”, according to the article in the Times. It is being reported this morning that the UK Treasury is drawing up plans to reassure investors following May’s speech and that US President elect Donald Trump also told The Times he will offer the UK a fair trade deal.’
However, if May shocks everyone and indicates that retaining some level of access to the EU single market will form part of Brexit negotiations, it’s possible that we could see the GBP EUR and GBP USD exchange rates stage something of a rebound.
The Guardian had this to say of May’s upcoming speech; ‘Every word, every phrase, every inflexion will be analysed within an inch of its life. How could it be otherwise? The burden of expectation borne by this speech is crushing. It reflects months of work by the PM, her closest aides and cabinet colleagues, advised by senior officials such as Jeremy Heywood, the cabinet secretary, and Oliver Robbins, the permanent secretary for the Department for Exiting the European Union.’
UK data could also have a part to play in how the Pound performs this week, although with the British currency largely decoupled from ecostats since the June Referendum, any boost offered by upcoming releases may be limited.
Will UK Inflation & Employment Figures Lend the GBP EUR Rate Support?
Of the ecostats set for release this week, those with the most potential to have an impact on the Pound Euro exchange rate include Tuesday’s Consumer Price Index (which is expected to rise from 1.2% to 1.4%) and Wednesday’s employment figures.
As it stands, the national unemployment rate is expected to hold at 4.8% and average weekly earnings including bonuses are believed to have risen from 2.5% to 2.6% – both results which would traditionally be seen as Sterling-supportive.
In terms of news from the Eurozone, the region’s ZEW economic sentiment survey and final inflation figures for December will be of interest.
As markets reopened after the weekend the Pound Euro exchange rate had recovered some of its recent losses and was trending in the region of 1.1373