Brexit Update: GBP retains its strength as official EU leave date passes

Brexit Update: GBP retains its strength as official EU leave date passes

Published: February 3rd, 2020

Helped along by Thursday’s Bank of England announcement of unchanged interest rates, the pound pushed further ahead in early trading on Friday with GBPUSD touching a one-week high around 1.3135.

GBPUSD had dropped as low as 1.2980 before the BoE meeting, then edging higher after the rate decision.

Sterling made healthy gains across the board on Friday against the Australian dollar, returning to levels last seen in mid-2016. If the recent series of higher lows continues, and a close above 1.95223 is achieved, analysts say upward momentum could continue in the short- to medium-term.

While the BOE’s boost was greeted with enthusiasm by Pound bulls, UK-EU trade talks starting the next few weeks could reveal tensions that unnerve markets. In the early going, however, the meetings are unlikely to give Sterling much of a jolt.

Together it points to ongoing positive momentum going into the new week.

Support from BoE on interest rates

The UK Central Bank surprised markets on Thursday with a cautiously hawkish stance, keeping rates unchanged at 0.75%, and broad consensus across the MPC. Odds were understood to be 50-50 ahead of the event, and the market had priced-in support for a cut.

BoE also removed mitigating language that would indicate future rate rises would be limited and gradual, another unexpectedly upbeat note. BoE Governor Mark Carney also made encouraging comments -- leavened somewhat by the usual caveats on Brexit and concerns for global growth.

A look at recent growth data

The pound’s strength held firm amid mixed signals from the UK macroeconomic calendar. The CBI’s survey of realized sales indicates flat growth for a third consecutive month, beneath the market’s expectations. The GFK Consumer Confidence Index, however, did improve in January, up to -9 from -11.

In the coming days, the UK macroeconomic calendar will see final versions of the January Markit PMI. Manufacturing is expected to remain unchanged at 49.8, while services may be revised downward to 49.1. Construction output is expected to be revised higher from 44.4 to 45.9. On the other side of the Atlantic, the US will release its official January PMI, as well as the influential monthly Non-farm Payrolls report.

Politics and the future trading relationship

An hour before the deadline passed, Number 10 broadcast a speech from PM Johnson where he announced that ‘a new era’ had begun, and made conciliatory remarks about the country’s broad Remain constituency.

He said the government’s job is now to bring the country together and take it forward. "It's not an end; it's a beginning," Johnson added.

The Prime Minister also referred to taking control of immigration, establishing free ports and developing a new set of UK trade rules and regulatory regimes. Johnston has adopted a (politically) bullish tone, focusing on themes of national renewal, regional equality, and growth.

The content of the speech held no surprises and as such isn’t expected to affect the Pound when markets open on Monday.

What comes next?

After 47 years membership of the European Union, the UK has now departed the union and entered into a transition period with the EU that continues ‘til 31 December 2020. Until that date, most EU laws will remain in force, and both sides will look to draw up a comprehensive trade agreement.

UK Prime Minister Boris Johnson has called it the ‘dawn of a new era’, while European Commission President Ursula von der Leyen told the press, ‘It is the story of old friends and new beginnings now’.

In the coming months, the Brexit deal will need to be ratified by the European Parliament, seen by markets as a formality. The European Commission will also ask member states to give it a clear negotiating mandate and clarify the areas to be negotiated.

Post-Brexit GBP outlook: critical dates for the economic calendar

  • February 25 – member states meet to vote yes or no on the EU’s negotiating mandate, allowing talks to being in March.
  • March 9-12 – a Plenary Session of the European Parliament where trade ministers will hear an update on trade discussions.
  • March 26-27 – EU Summit meeting.
  • June 18-19 – EU Summit meeting.
  • June 30 – This is the final date that the UK can ask for an extension of the transition period, with a maximum extension of two years.
  • November 23-26 –Plenary session of the EU parliament where a UK trade deal must be presented for a vote.
  • December 31 - Brexit implementation period ends.

A new era for the Pound?

After a shock referendum result and three years of political turmoil, the UK has left the EU.

The two sides will have to agree the terms of their future relationship before the transition period ends in October 2020. Late on Friday, Johnson met his Cabinet and discussed the possibility of a Canada-style EU trade agreement.

In the short-term, Coronavirus may be the bigger concern

The WHO declared the coronavirus outbreak an international public health emergency; however, without travel or trade bans against China. Against that backdrop, the first two confirmed cases of the virus were reported in the UK. The reaction so far has been limited to news headlines, but if the situation continues to escalate, fear could impact the sentiment around Sterling.

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