Sterling fell to a one-week low against the dollar on Tuesday following the release of disappointing data confirming that British economic recovery will be slow.

Neil Wilson of Markets.com said that “Sterling extended a selloff after the GDP numbers disappointed”: “The UK is already seeing what a non-V recovery looks like. GDP growth rebounded 1.8% in May, which was well short of the 5.5% expected. In the three months to May, the economy contracted by 19.1%. Some of the numbers are truly horrendous and it’s hard to see how the economy can deliver the +20% rebound required to get back to 2019 with confidence sapped like it is and unemployment set to rise sharply.”

GDP numbers

The Office for National Statistics reported that the Gross domestic product rose by 1.8% in May after falling 20.3% in April, and a 6.9% in March. This was due to the reopening of businesses with factories and construction workers returning to work. Britain’s manufacturers increased their output by 8.4% while the construction sector grew by 8.2%.

However, City economists forecast a 5.5% rise in growth for May. Additionally, the last quarter, the economic slowdown has been worse than expected. The data today shows that the UK economy contracted by 19.1% in the March-May quarter.

Jonathan Athow, Deputy National Statistician for Economic Statistics, says: “Manufacturing and house building showed signs of recovery as some businesses saw staff return to work. Despite this, the economy was still a quarter smaller in May than in February, before the full effects of the pandemic struck. In the important services sector, we saw some pickup in retail, which saw record online sales. However, with lockdown restrictions remaining in place, many other services remained in the doldrums, with a number of areas seeing further declines.”

Services sector disappoints

The services sector fell by 18.9% in the last quarter and production shrank by 15.5%, according to the ONS. There was a 37.8% fall in education and a 31.4% drop in health output. Food and beverage service activities contracted by 69.3%. Manufacturing output fell 18.0% in March-May and the transport equipment manufacturing dropped by 45.7%.

Economists

Jeremy Thomson-Cook, Chief Economist at Equals PLC, said that that there are few signs of the UK economy recovering quickly: “May’s run of GDP, industrial production and services sector activity confirms that it’s easier to fall down a lift shaft than walk up a flight of stairs and the ongoing economic recovery will need many more months before any vague sense of normality is restored. There are few signs that the UK economy is close to anything resembling a v-shaped recovery although we expect that June’s data will be better than May’s which have shown little more than a false dawn.”

James Smith, Research Director of the Resolution Foundation, says that economic recovery from the Covid-19 has started: “Today’s data tells us that the UK economy started to recover as lockdown restrictions were eased in May. But what would normally be seen as strong growth in May of 1.8 per cent mainly reflects the depth of the lockdown’s economic damage, rather than a swift or V-shaped recovery. The economy was still just three-quarters of the size it was as recently as February. While we should expect strong immediate bounce backs in many sectors, such as retail which grew by 12 per cent in May, what recovery we actually see from here will depend on how people respond to the easing of restrictions and, crucially, the course of the public health crisis. Ultimately, the UK economy is unlikely to return to close to its pre-covid economic path until a vaccine or treatment is found.”

Indeed, the figures are dire and the challenge great. The chancellor of the Exchequer, Rishi Sunak, said that the numbers “underline the scale of the challenge we face. I know people are worried about the security of their jobs and incomes. That’s why I set out our Plan for Jobs last week, following the PM’s new deal for Britain, to protect, support and create jobs as we safely reopen our economy. Our clear plan invests up to £30bn in significant and targeted support to put people’s livelihoods at the centre of our national renewal as we emerge through the other side of this crisis.”

If you are sending money abroad and are worried about currency volatility, please get in touch with Universal Partners FX. UPFX’s dedicated foreign exchange specialists can help you access the most competitive exchange rates and make your currency transfers stress-free.

The pound has regained its momentum since yesterday, after the positive news of new US Federal Reserve stimulus and the latest post-Brexit trade talks between the EU and the UK.

Sterling rose after Prime Minister Boris Johnson said yesterday that there is a "very good chance" a trade deal will be made with the EU. Both Johnson and the EU Commission President Ursula von Der Leyen agreed that there will not be an extension to the Brexit transition period, which will end on 31 December 2020. The pressure is now on both sides to agree on a post-Brexit trade deal, so the UK does not leave the bloc without a deal. If the UK leaves the bloc without a deal, then Britain will revert to World Trade Organisation terms, which will mean that the UK would have to pay high tariffs and quotas at a time when the country’s economy is dealing with the Covid-19 pandemic.

Fresh Momentum injected into the negotiations

According to Reuters, the hour-long video call on Monday between Johnson and the EU Commission’s von Der Leyen, “has injected fresh momentum” into the negotiations, as “people on both sides with knowledge of the conversation,” attested. The “EU inferred from Johnson’s contributions that he is willing to soften his position and European officials told him they are ready to do the same.” After the call, Johnson said: “I don’t think we are actually that far apart -- what we need to see now is a bit of oomph in the negotiations. The faster we can do this the better: we see no reason why you shouldn’t get that done in July.”

Obstacles Remain

Johnson’s latest communication with the EU comes after three months of trade talks which have ended in deadlock. However, things might not be completely resolved just yet, as EU Council President Charles Michel warned that the EU will not “buy a pig in a poke” as it was not in any hurry to reach an agreement. He said: “We won’t just speed up. We have to remain focused on content and consequences.” While the UK has been pushing to speed up the discussions, the EU wants to make reasonable steps, with the next discussions to resume on 29 June. Johnson explained that he is against the talks “going on until the autumn, winter, as perhaps some in Brussels would like.”

Both sides have failed to reach an agreement on a free-trade deal as well as find common ground when it comes to certain EU standards and demands regarding fishing rights and security which the UK believes are binding it to EU rules. Also, the UK continues to refuse to accept the power of the European Court of Justice to settle any disagreements between the two sides.

Pound Remains Unpredictable

With Brexit negotiations in the background, Paul Meggyesi, Head of FX Research at JP Morgan noted that the pound’s trajectory would remain unpredictable. He said: “GBP is liable to become ever-more idiosyncratic as the UK nears the business end of the entire Brexit process, the last six months of the transition period, with still a trade deal to be negotiated. This puts GBP at the mercy of unpredictable Brexit news flows, and investors should be prepared for potentially quite violent swings in GBP as the market tries to benchmark probabilities of the potential outcomes and eventually moves from valuing GBP on a probability-weighted basis to pricing a central scenario and then the eventual outcome itself.”

If you are sending money abroad and are worried about the pound’s volatility, please get in touch with Universal Partners FX. UPFX’s dedicated foreign exchange specialists can help you access the most competitive exchange rates and make your currency transfers stress-free.

Brexit has been instrumental in the pound’s trajectory, responsible for its collapse and slow recovery. The coronavirus pandemic comes to add more pressure to the pound due to the lockdown measures and the ensuing adverse economic effects.

In the short term, as the UK grapples with the threat of Brexit and the coronavirus, the outlook looks extremely negative. But, how will the pound fair in the long term?

What’s happening now?

Sterling has been hit by Brexit and the coronavirus crisis, with the latter making its effects on the British currency very clear in mid-March, when the GBP plunged to levels not seen in 35 years with anxious traders turning towards safe havens such as the greenback. Until the pandemic is over, analysts predict that the pound will continue to be weak. At the moment, Sterling will remain reactive to headlines concerning the pandemic which has triggered the deepest decline in economic activity since 1929.

Indeed, things have changed a lot since last December when traders felt optimistic about Boris Johnson’s decisive victory in the general election, with many expecting significant progress in the Brexit talks and positive economic data.

Now, with the transition period due to expire at the end of the year and the government saying that it will not ask for an extension, the reality looks different, with the possibility of leaving without a deal posing a real threat to the pound’s future. This means that the UK could fall into a recession as economists have warned.

Short-term predictions

Georgette Boele, Senior FX Strategist at ABN AMRO has said: "In the near-term we expect another wave of risk-off in financial markets as markets are in our opinion too optimistic currently on the speed and strength of economic recovery." Boele added: “There is an enormous gap between the economic reality and what analysts forecast, on the one hand, and the optimism among investors for the second half of this year, on the other. This should support the U.S. Dollar as most liquid safe haven currency."

Long-term predictions

Following Brexit, the forecast for the pound has been dire.  As Brexit troubles are not over yet, and as the coronavirus continues to inject fear in investors, the long-term outlook for the pound is definitely bearish.

Since the June Brexit referendum, consumers have underpinned Britain’s economic expansion as businesses stopped investing. Despite the fall in the pound, consumer spending has grown since the vote, and with many businesses now closed due to the coronavirus, understandably, there are concerns for an economy so reliant on consumption.

With the economy hurt due to lockdown restrictions and a lack of exit strategy, the pound will be under pressure for the long term.

GBP: Investors turn bearish

In the Financial Times article “Investors turn bearish on the pound,” Philip Georgiadis writes that investors are anticipating further falls for the pound and have “increased their bets against the UK pound to the highest level of the year, raising the spectre of a new bout of volatility for the currency.” According to the article, “fund managers and other companies betting in the futures market have turned bearish as concerns over Brexit rise in parallel with the damage the coronavirus pandemic is causing the UK economy.”

Similarly pessimistic is Rabobank which says: “Additionally, insofar as no real progress was made on the last round of post-Brexit talks between the UK and the EU and given that the summer deadline for any request for an extension to the transition phase is looming, it is difficult to be optimistic on GBP.”

Analysts at Danske Bank also find that in the coming months the pound will remain under pressure as “Time spent fighting the coronavirus by both the UK and the EU means less time to negotiate a deal before the end of the year, increasing the risk of a big trade shock by 1 January 2021.”

While overly optimistic valuations might fall to meet reality and as such drive the pound lower, there is also the possibility of the British currency strengthening as the global outlook improves. Sterling’s weakness due to global uncertainty could be reversed as nations successfully fight the virus and recover.

What is certain, is that there are no certainties and the pound could easily come under pressure as optimism withers.

How UPFX can help

If you have a Sterling transfer, wish to better understand the market outlook or want to discuss your FX needs with a foreign exchange currency specialist, please get in touch with Universal Partners FX.

With UPFX you can save money on your international currency transfers, access competitive exchange rates and a dedicated customer service.

Sterling was under pressure after Friday’s British retail sales figures showed that sales fell in March, despite an increase in consumer goods, particularly alcohol.

This was the biggest fall since 1996 when the Office for National Statistics (ONS) began recording the figures. As Rhian Murphy, ONS head of retail sales said, “Retail sales saw their biggest monthly fall since records began over 30 years ago with large declines in clothing and fuel, only partially offset by strong food sales. The “retail armageddon” as was described by Ayush Ansal, chief investment officer at hedge fund Crimson Black Capital, was a reflection of the Covid-19 pandemic.

The pound has been sensitive to gloomy economic figures but also coronavirus updates, as the foreign exchange market is watching to see how the country deals with the lockdown and how fast it recovers.

UK retail sales: Economists predict further fall in April

Thomas Pugh of Capital Economics noted that the record fall in UK retail sales last month demonstrates that consumption has fallen during the lockdown:

“At one end, there were clear signs the pandemic was keeping consumers away from the high street, non-food sales excluding petrol and online sales were down by 19.4% m/m, with an especially sharp 34.8% m/m fall in clothing sales. And petrol sales declined by 18.9% m/m. Department store sales did rise by 2.8% m/m, but appears to be due to purchases of food and other items online. On the other hand, food & drink sales were up 10.4% m/m (within that alcohol 31.4%!) and online sales (non-department store) rose by 5.9% m/m, as consumers were locked down at home.”

But the fall in March is only the beginning, as economists believe that April will post a bigger fall. Alan Custis, head of UK equities at Lazard Asset Management, says that “the real story will be seen in April’s figures when the lock-down will be fully felt by retailers. Here we expect to see dire numbers, but it must be balanced up by very strong online sales, which we expect will be showing growth in excess of 50% year on year. There have been clear winners and losers and we think this will only become more apparent the longer the crisis continues.”

Consumer confidence at its lowest

Further disappointing stats did nothing to support the pound. On Friday, data from the research company GfK showed that British consumer confidence was at its lowest in April.

The balance of consumers who were considering making major purchases dropped to minus 52 in April, while, the net balance of those expecting their financial situation to improve dropped to minus 14. Howard Archer, chief economic adviser at the consultancy EY Item Club said: “The near-term fundamentals for consumer spending have clearly taken a very substantial downturn as a result of coronavirus. Many people have already lost their jobs, despite the supportive government measures while others will be worried that they may still end up losing their job once the furlough scheme ends.”

Transferring funds?

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A weakening global investor sentiment and a collapse in oil prices has hurt the pound, but the British currency gained slightly on Wednesday despite news that UK inflation fell in March.

Oil

Brent crude oil lost a further 10% in value and WTI crude 5% on Wednesday. The slump in global oil prices demonstrates the massive drop in activity which hasn’t yet been priced by markets. Later on Wednesday, there was a jump in the price of oil, partly the result of a tweet in which President Donald Trump said  that he had “instructed the United States Navy to shoot down and destroy any and all Iranian gunboats if they harass our ships at sea.”

Inflation

After the government’s Covid-19 lockdown measures which hit demand for some goods, inflation figures on Wednesday painted a negative image of things to come, as the Office for National Statistics (ONS) reported a 0.2% drop. While this was expected, as consumers spent less on clothing and fuel due to the lockdown, there are concerns that there will be further drops if restrictions continue. The pound could fall further if dire economic data continues, the oil market is further weakened, and investors’ mood drops.

According to the ONS, consumer prices rose by 1.5% per year last month, down from 1.7% in February, which was the lowest since December, as cheaper clothing and fuel pushed inflation down. The ONS explained: “Falls in the price of motor fuels and clothing resulted in the largest downward contributions to the change in the CPIH 12-month inflation rate between February and March 2020. Rises in air fares produced the largest, partially offsetting, upward contribution to change.”

The ONS believes that people avoided shops or stockpiled essential items due to the coronavirus. While the lockdown was officially introduced on 23 March and prices were collected around 17 March, social distancing seems to have shaped consumer behaviours and retailers’ expectations, with less browsing in shops and more time spent indoors.

The inflation report also showed that due to the virus pandemic and failure of the Organization of the Petroleum Exporting Countries (OPEC+) to agree to cut supply in early March 2020, petrol prices fell by 5.1 pence per litre between February and March 2020.

What did economists say?

The drop in inflation in March is just the beginning and demand will continue to wane. Equals Group chief economist Jeremy Thomson-Cook said: “UK inflation stayed steady at 1.5% in March but the wider picture around prices shows that we will not be talking about high inflation for some time. A recession like the UK is currently enduring – we will wait on the data to confirm – naturally will see lower inflation through the destruction of a demand side to the economy whilst movements in oil markets of late show just what can happen to prices when demand dries up. You cannot have inflation without demand and if we are correct that demand rebounds slower than it fell – a Nike tick-shaped rebound – then the impulse into inflation should be low although a weak pound does remain a risk.”

Laura Suter, personal finance analyst at investment platform AJ Bell, says that the drop in oil prices and the change in shoppers’ attitudes will affect inflation: “Even before the recent capitulation, the price of oil was on the slide in March and this dragged inflation down slightly from February’s 1.7% to 1.5%. Oil prices have a massive impact on the UK’s inflation rate and with prices at the pump and home energy costs getting cheaper we’d expect this trend to continue for the next couple of months….What’s more, with retailers having to shut their doors we’re seeing more and more offer discounts to shoppers to move their buying online.”

UPFX

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Sterling has hit an 18-month high against the US dollar and a three-year high against the euro after the Conservative party won the general election with a majority. Investors have welcomed the results as the Prime Minister’s majority means clarity and certainty on Brexit. The pound’s surge vs the US dollar is one of the biggest gains in a decade and economists are now predicting that sterling could strengthen even further.

Since the release of Thursday night’s exit poll clearly showing Boris Johnson was expected to win the election, the pound has gained strength, both against the US dollar and the euro. Now investors are hopeful that Brexit will be delivered on time by the end of January 2020 with Johnson’s Brexit deal.

Conservative triumph: Best outcome for the markets

According to financial analyst at MUFG, Lee Hardman, the election is “the best outcome for financial markets in the near-term. It brings a clear end to the Brexit deadlock in parliament, which will be welcomed and help to ease some of the ongoing uncertainty. The risk of a ‘No Deal’ Brexit will pushed out until the end to next year, and the new government will not be as reliant on securing support from hard Brexiteers during future negotiations. The pound is well placed to extend its advance even after recent strong gains.”

However, other economists are warning that the possibility of a no-deal Brexit in 2020 will put more pressure on the economy. Paul Dales of Capital Economics said that “The majority confirmed in Parliament will allow Johnson to pass his Brexit deal, which would mean the UK leaves the EU on 31st January and enters a status quo transition period until 31st December 2020. A fiscal stimulus of £20bn per year (1% of GDP) may then follow in a Budget in February. But this probably won’t unleash a tidal wave of business investment that leads to much faster GDP growth, much higher interest rates and a much bigger rise in pound than the gain … already seen. That’s because businesses will fear that the UK could end up trading with the EU on WTO terms after 31st December 2020, the immediate effects of which would be similar to those of a ‘no deal.’”

While many investors and analysts have highlighted the uncertainty regarding the next phase of Brexit and the future relationship the UK will negotiate with the EU, nonetheless, the Conservative’s victory is the ideal result for businesses as a clear majority eliminates the risk of a hung parliament and Corbyn’s radical politics, and eases anxiety about Brexit.

Getting Brexit done

This is why, the next step would be for the Prime Minister to secure the right deal with the EU so that businesses can thrive. The Institute of Directors, for example, is asking Johnson to give time to businesses to adjust and secure the right deal with the EU rather than just any deal. Jonathan Geldart, director general of the Institute of Directors, said:

“Business leaders’ thoughts will immediately be turning to Brexit. For directors, ‘Get Brexit Done’ will only have meaning once the details of our long-term future relationship with the EU are clear, they need a framework to plan for the future from. The Prime Minister must resist the urge for arbitrary negotiating deadlines, and should commit to a proper adjustment period that starts when businesses know the full detail of what changes they may be facing. Our members have made clear that the content and shape of any new deal are much more important than simply the speed in getting there.”

Not only the markets, but also the US president welcomed the results. Donald Trump tweeted: “Congratulations to Boris Johnson on his great WIN! Britain and the United States will now be free to strike a massive new Trade Deal after BREXIT. This deal has the potential to be far bigger and more lucrative than any deal that could be made with the E.U. Celebrate Boris!”

Indeed, with the election results, the UK has demonstrated its preference for Johnson’s clear-cut logic for getting Brexit done and its distaste for Corbyn’s left-wing policies. At the same time, analysts are cautious about the dampening effect Brexit has had on growth and the uncertainty it will continue to exert on the economy as the UK strives to secure a trade deal.

Transferring money overseas?

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Sterling has suffered after Boris Johnson’s no-deal Brexit rhetoric caused reaction among economists and cabinet ministers who continue to warn against it.

A free trade agreement after no-deal Brexit

Johnson’s government and figures in his cabinet, such as Dominic Raab, said that the UK would be in an advantageous position to negotiate a good deal after no-deal Brexit. European Union officials rejected Raab’s claim that agreeing on a free-trade deal after a no-deal Brexit would be “much easier.” A senior EU diplomat expressed the EU’s fears that a no-deal Brexit would trigger the destruction of political relationships and a rhetoric of blaming.

He said: “It would mean the complete breakdown of political relations and I don’t think there would be much trust on the EU side with the Tories, or with the prime minister. Eventually we would get around it because we are pragmatic, but this would be really, really bad, because of all the rhetoric around blaming.”

For another diplomat, after a no-deal Brexit, contact between the EU and the UK would break down: “Our phones will not be connected at that time … I don’t think they will be connected to someone who has reneged on their obligations.”

For the European officials, the most important element is to honour the three basic principles of the withdrawal agreement: citizens’ rights, the Irish border and the financial settlement.

Despite Johnson’s claims to the opposite, renegotiating a trade deal would be a lengthy and arduous process, something almost impossible. As Tanja Fajon, the Social Democrat member of the European parliament’s foreign affairs committee, said, renegotiating “a free trade agreement usually takes years and I believe the UK doesn’t have that time after a no-deal Brexit.”

In addition, Johnson’s character, his threatening attitude towards the EU, make him an unlikeable character according to the MEP, allied to the Labour party: “Who would want to do business with [Johnson] if he is serious with his threats not to pay €60bn (£54bn) debts to the EU? Who wants to deal with the country who doesn’t pay its bills?”

EU hoping for soft Brexit Tories to stop no-deal Brexit

 

Speaking on BBC Radio 4’s Today programme, Raab said that it would be easier to deal with the Irish border through a free-trade agreement after the UK is released from the EU’s “demands and unilateral dictates.”

Over the weekend, it was rumoured that Johnson was “turbo-charging” preparations for no deal, while his strategist for a no-deal Brexit, Michael Gove, said the government was preparing for leaving without a deal.

 

But the EU is reluctant to reopen the deal that was agreed with Theresa May, hoping that certain Tories would try and prevent the hardcore Brexiteers from crashing out of the EU without a deal. The EU would seek to defend its own interests, a spokesman of the European commission said, as Johnson’s ministers continue supporting their no-deal Brexit plans.

He said: “The UK preparedness is not for us to deal with. Our no-deal preparedness protects the EU and our interests in the case of a no-deal Brexit. A no-deal scenario is not our preferred outcome.”

Universal Partners FX and hedging strategies against volatility

Whether you are an importer or exporter, or you conduct your business abroad through regular transfers of funds, the recent no-deal Brexit rhetoric has definitely affected your finances as the pound has sunk against the US dollar and the euro.

While the government would ideally want to avoid a no-deal outcome, leaving without a deal is increasingly becoming a very likely prospect, something that is worrying both investors and ministers.

If you want to hedge your funds and avoid currency volatility, get in touch with UPFX and find out how they can hep you navigate around political and financial uncertainty.