The pound was pulled from different directions yesterday, as on the one hand, the Bank of England hinting at negative interest rates pushed it lower, and on the other hand, positive Brexit news helped lift it.

The pound fell after the Bank of England said that it is considering how to use negative interest rates and it will discuss with regulators how to efficiently implement them. The pound dropped sharply after the announcement.

As quoted on Bloomberg, Valentin Marinov, head of foreign exchange research and strategy at Credit Agricole SA, said: “Negative rates are the nuclear option. It could ultimately push the pound into uncharted territory of losing whatever is left of its rate advantage.”

A Brexit Trade Deal is Still Possible

Despite the negative news, there was a glimpse of positivity on Thursday after the EU Commission President Ursula von der Leyen said that she remains "convinced" that an EU-UK trade deal is still possible, which helped the pound recover. Von der Leyen, speaking to the Financial Times, said: "I am still convinced it can be done. It is better not to have this distraction questioning an existing international agreement that we have, but to focus on getting this deal done, this agreement done - and time is short." Another EU diplomat said that "we should not overreact... We will continue negotiations because there are two separate tracks: one is the one which the UK has decided to violate, and the other is the future relationship."

If markets maintain a similar view that a trade deal is possible then the pound will be supported.

Bank of England’s Negative Interest Rate Surprise

After the Bank unexpectedly said that it was considering the possibility to cut interest rates to 0% or below in the coming months, to help support the economy, the pound fell.  There have never been any negative interest rates before in the UK and if the Bank moves ahead with changing the rates to record lows, this could really shake the financial system, especially due to the UK’s current account deficit. As Pound Sterling Live noted, this could leave “the UK's financial system, and Pound Sterling in particular, exposed to capital withdrawals from foreign investors.”

The shocking revelation was found within the Bank’s minutes to the meeting where it stated that it would start a "structured engagement" with the Prudential Regulation Authority in order to potentially cut interest rates to negative.

Senior market analyst at Western Union, Joe Manimbo said: "The U.K. Pound staged a swoon after the Bank of England dropped clear signals that it was edging closer to implementing negative borrowing rates. The big news was that officials were actively studying plans to push rates below zero given the ‘unusually uncertain’ economic outlook. Central bankers noted better data of late but signalled heightened concern related to Covid uncertainty, expectations of a sharp rise in unemployment and potential Brexit shocks."

However, some economists believe that the Bank will not push interest rates into negative territory and the recent news is part of the Bank’s research into negative interest rates rather than something more solid and definite.

But as Bloomberg said, a no-deal Brexit might just be the trigger for the BoE to use negative rates: “It’s becoming increasingly likely that if the economy is blown off course next year, the central bank could employ sub-zero rates.”

With the UK struggling to contain coronavirus infections, the imposition of new lockdown restrictions, unemployment and a disruptive Brexit could make the situation in the UK very difficult and push the Bank to make some hard decisions.

 

Are you Transferring Funds Abroad?

If you are worried about the possibility of a no-deal Brexit, and the British currency falling even further, you should get professional assistance when transferring funds abroad. Whether you are sending money to family or friends, paying employees overseas, or managing regular payments abroad, you need to protect your international payments’ budget from market volatility. Get in touch with Universal Partners FX to find out about efficient risk management and tailored solutions to your transfer needs.

 

The pound rose against the dollar on Wednesday, as the greenback was under pressure following the release of disappointing US retail sales figures for August.

The GBP/USD pair rose higher to weekly tops, despite the Brexit impasse and the latest saga with Boris Johnson’s Internal Market bill.

Wednesday's main event was the highly anticipated FOMC monetary policy decision - where rates look set to remain stable at near zero - and updated economic and inflation projections, ahead of Thursday’s BoE meeting. Due to the key FOMC event, trading opportunities and volatility around the GBP/USD currency pair might arise ahead of the event.

Brexit

The pound was also supported after Justice Secretary Robert Buckland hinted the Government could amend the Internal Market Bill in order to compromise with Tories criticising the PM for breaking an international treaty and avoid a rift within the Conservative party. The government’s change of heart could help soften the EU’s stance and resume negotiations with the EU.

Buckland said that the original plans in the Bill could be made "acceptable to all Conservative colleagues".

With investors digesting the political reality and remaining confident that a deal is still possible, the pound was lifted after the initial news of the Internal Market bill.

"Outsized moves in GBP ... have injected a sizeable risk premium in GBP. It's now trading at a decent discount on our short-term valuation, underscoring that some of the recent Brexit news has already been priced in. At the very least, this backdrop suggests that in the coming weeks GBP would benefit more from good news rather than sink further on bad news. We still expect more volatility but risk/reward favours taking profit at these levels," said Mark McCormick of TD Securities.

Bank of England Policy and Interest Rate Decision on Thursday

The Bank of England will try and assess on Thursday the UK’s economic recovery and whether it needs to adjust its policy to offer more monetary support. For many economists, now it is not the right time to make significant changes to its package. Adding to the Bank’s woes about the UK economy comes the UK inflation which fell to its lowest level in nearly five years, to an annual 0.2%, far away from the Bank’s official 2% target.

The Bank is expected to take action in its November meeting, as the economy slowly recovers. According to the Organization for Economic Cooperation and Development forecast released on Wednesday, UK gross domestic product would shrink by 10.1% this year, while the economy is forecast to rebound in 2021. Given the political and economic uncertainty, the BoE will possibly wait and see what kind of fiscal stimulus is necessary to support the economy. But Reuters noted that “While the central bank is widely expected to hold fire, policymakers are likely to conclude that downside risks to the economy are rising for the economy due to rising Brexit uncertainty and renewed restrictions on social activity.”

Are you Transferring Funds Abroad?

If you are worried about the possibility of a no-deal Brexit, and the British currency remaining sensitive to Brexit uncertainty, you should get professional assistance when transferring funds abroad. Whether you are sending money to family or friends, paying employees overseas, or managing regular payments abroad, you need to protect your international payments’ budget from market volatility. Get in touch with Universal Partners FX to find out about efficient risk management and tailored solutions to your transfer needs.

Fears that Britain will leave the European Union without any trade agreement sent the pound to new 5-1/2-month lows on Friday, despite the UK economic recovery and a new trade deal with Japan. Businesses are as worried as ever as Boris Johnson’s government continues to defy calls from the EU to be more flexible and meet its demands. With Johnson’s latest controversial bill, businesses that export and import goods from/to Ireland are in a precarious position.

Theresa May, the former prime minister, asked: “How can the government reassure future international partners that the UK can be trusted to abide by the legal obligations of the agreements it signs?”

Worst week for the pound

Reuters reported that this is the worst week for the pound both against the euro and the dollar since mid-March. The fall was the result of reports that “Brussels has stepped up planning for a ‘no-deal’ Brexit after Prime Minister Boris Johnson’s government refused to revoke an ultimatum on breaking the divorce treaty which Brussels says will sink four years of Brexit talks.”

Klaus Baader, global chief economist at Societe Generale said: “The probability between a deal and no-deal are definitely shifting towards a no deal -- that is very clear. The risk of a no-deal is increasing every day.” Morgan Stanley also said that the risk of Britain exiting on “WTO terms” had risen to 40% compared to 25% earlier.

UK Rejects EU’s Demands, as Brexit Uncertainty Increases

The EU has warned the UK that the controversial elements of the Internal Market Bill are illegal and that it will need to remove them by the end of the month. Tories have also criticised Boris Johnson’s proposed Internal Market Bill, which will be debated on Monday by MPs in the House of Commons.

The new bill puts into question the Northern Ireland protocol, which is part of the Brexit withdrawal agreement approved in January. The protocol ensures that the province will come under the European Union’s single-market rules in order to avoid a hard border in Ireland. However, the new law would give UK ministers the right to change rules regarding the movement of goods if the UK and EU are unable to reach a trade deal. A government spokesman said that the bill will "ensure the government can always deliver on its commitments to the people of Northern Ireland". The bill tries to bypass the formal discussions and bend the rules to deliver Brexit at all costs.

The EU said that these new changes needed to be removed as they jeopardise the UK-EU trade talks. But the government has defied the EU saying that the PM’s proposed bill seeks to protect the “integrity of the UK and the peace process in Northern Ireland.”

On Monday, informal talks between the two sides will resume as differences remain and Brexit appears as uncertain as ever. With the UK government referring to the EU’s lack of realism, one would perhaps question whether discussions will reach any agreement or things would soon diverge even further.

The next official round of talks will begin on 28 September.

Positive News Fails to Lift the Pound

News that the UK has struck its first major “historic” post-Brexit trade deal with Japan has done little to offer substantial support to the pound. The deal will boost trade by about £15bn and International Trade Secretary Liz Truss said that it would bring "new wins" for British businesses in manufacturing, food and drink, and tech industries. However, critics said that the deal will only slightly boost the UK GDP by only 0.07%, which is not comparable to the trades that will be lost by leaving the EU. Britain said that 99% of its exports to Japan would be tariff-free.

But neither this news helped support the pound, neither the fact that the Office for National Statistics reported that UK economic output grew by 6.6% in July as pubs, restaurants and other sectors reopened.

Are you a Business Transferring funds abroad?

With businesses worried about the possibility of a no-deal Brexit, and the British currency remaining sensitive to Brexit uncertainty, you should get professional assistance when transferring funds abroad. Whether you are importing or exporting goods, paying employees overseas, or managing regular payments abroad, you need to be prepared and protect your business and bottom line from market volatility. Get in touch with Universal Partners FX to find out about efficient risk management and tailored solutions to your business’ transfer needs.

Sterling rose to an eight-month high due to dollar weakness and after Federal Reserve Chairman Jerome Powell said on Thursday that the Fed will tolerate inflation above 2.0%. This gave investors hope that the Fed will not try and control economic growth, something that could hurt the US dollar in the near future. On the other hand, on Friday, after Bank of England Governor Andrew Bailey’s speech, the pound remained unmoved. Both Bailey and Powell gave their speeches at the Jackson Hole central bank symposium which was held online this year rather than at the usual ski resort in Wyoming.

Fed’s decision marks a significant shift in monetary policy

The Federal Reserve has approved a significant change in the way it sets its interest rates by abandoning the usual practice of raising them to control higher inflation, something that will leave US borrowing costs extremely low. By signalling that it wants inflation to rise moderately above its 2% target, the Fed confirmed that inflation targeting in a world of lower interest rates is a thing of the past.

Andrew Bailey’s speech

On Friday, the Governor of the BoE delivered his keynote address to fellow central bankers online and not from the actual ski resort in the Grand Tetons where the conference was traditionally organised since 1982.

In his speech, Bailey said that central banks have a lot of strength to use quantitative easing to manage crises, such as Covid-19. As he noted characteristically, “Go big (and fast) or go home.”

The Bank of England governor did not provide details over short-term policy or on the UK economic situation, but he did reassure the financial community that the Bank will be able to deal with future crises: “We are not out of firepower by any means, and to be honest it looks from today’s vantage point that we were too cautious about our remaining firepower pre-Covid. But, hindsight is a wonderful thing when you have it.”

He also said that the Bank won’t seek to restrict monetary policy until there is significant economic progress: “The committee does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably. This important step is intended to ensure monetary conditions do not tighten prematurely when there are some initial signs of an economic recovery.”

According to Bailey, QE will be “more long-lived” and that the Bank has the power to fight recessions. In regard to Jerome Powell’s comments from yesterday, Bailey said that these suggest that flexibility can be useful for monetary policy and that a different exchange rate environment could justify different approaches.

The Bank of England increased quantitative easing by £745 billion in June, and in March it cut its main interest rate to a record low 0.1%. A paper with the Bank’s conclusions will be published alongside Bailey’s speech.

Are you Transferring funds abroad?

Whether you are sending money to family and friends, buying a property or paying your children’s tuition fees, Universal Partners FX are the leading foreign exchange experts who can ensure you get the best rates and transfer your money safely, fast and efficiently. With state-of-the-art software, a dedicated team of currency brokers, and friendly customer support, UPFX can offer peace of mind, transferring your funds securely and in the most transparent and professional manner.

Get in touch with Universal Partners FX to learn more about transferring your funds overseas.

Sterling has rallied after better than expected forecasts from the Bank of England. The Bank noted that the economic standstill in the period between April and June was “less severe” than anticipated. While the UK economy has considerably shrunk this year due to the Coronavirus, it is now on a path to recovery, slowly picking up again.

Bank of England Monetary Policy Meeting

In its Thursday morning meeting, the Bank decided to keep UK borrowing costs at record lows, interest rates at just 0.1%, and its quantitative easing programme at £745bn.

According to its forecasts, UK recovery will take longer but the slump will be less severe. The Bank said that “the fall in output in Q2 is expected to have been less severe than was assumed in the illustrative scenario in the May Report. In that scenario, it was assumed that restrictions would be gradually unwound between early June and late September, but they were lifted earlier.” In terms of recovery, this will take time:

“In the MPC’s central projection, GDP continues to recover beyond the near term, as social distancing eases and consumer spending picks up further. Business investment also recovers, but somewhat more slowly. Unemployment declines gradually from the beginning of 2021 onwards. Activity is supported by the substantial fiscal and monetary policy actions in place. Nonetheless, the recovery in demand takes time as health concerns drag on activity. GDP is not projected to exceed its level in 2019 Q4 until the end of 2021, in part reflecting persistently weaker supply capacity. Given the scale of the movements in output, as well as the inherent uncertainty over the factors determining the outlook, the evolution of the balance between demand and supply is hard to assess.”

Labour market and employment

The Bank also warned that unemployment will rise sharply by the end of the year. The Bank’s monetary policy committee said:

“Employment appears to have fallen since the Covid-19 outbreak, although this has been very significantly mitigated by the extensive take-up of support from temporary government schemes. Surveys indicate that many workers have already returned to work from furlough, but considerable uncertainty remains about the prospects for employment after those support schemes unwind. In the near term, the unemployment rate is projected to rise materially, to around 7½% by the end of the year, consistent with a material degree of spare capacity.”

The unemployment rate is currently 3.9%, and the government’s furlough scheme is helping employers to keep their staff.

The Monetary Policy Committee highlighted the threat of unemployment, which will remain high next year too. The Bank’s economists said that the “Labour market slack persists over the first half of the forecast period, as unemployment is judged likely to decline only gradually after peaking in Q4. The gradual decline in part reflects an expectation that hiring will pick up relatively slowly, consistent with uncertainty affecting companies’ demand for labour. In addition, the MPC judges that there is likely to be some reduction in the efficiency with which people can find jobs. That tends to happen as unemployment rises, as some people take time to find new jobs, and their skills erode. Moreover, in the present conjuncture, the dispersed effects of Covid-19 on economic activity across sectors are judged to be likely to result in a greater degree of mismatch than usual, given differences between the sectors from which workers have been made unemployed and the sectors in which firms are posting vacancies.”

Speaking at a press conference on Thursday to discuss the Bank’s Monetary Report, Bank of England governor Andrew Bailey said that the forecast that unemployment might almost double to 7.5% is a “very bad story.” But he also said that it will eventually fall back to 4.5% by the end of 2022.

Negative Interest Rates?

The Bank of England said that it is currently considering the possibility of imposing negative interest rates in the UK, as other banks including in Japan and the Eurozone, have done. This means that banks will be charged for leaving money with the central bank, so they are forced to lend them. The Bank is currently deciding whether this will impact on the financial system, economic confidence and bank profits, as well as savers. According to the Bank, “the effectiveness of a negative policy rate will depend, in part, on the structure of the financial system and how the policy transmits through banks to the interest rates facing households and companies. It will also depend on the financial and economic conditions at the time.”

 

Transferring funds abroad?

Bank of England governor Andrew Bailey said that “There are some very hard yards, to borrow a rugby phrase, to come. And frankly, we are ready to act, should that be needed.” If you feel the same and you are ready to act, then get in touch with Universal Partners FX. Whether you are transferring funds overseas to family or for a new property, then Universal Partners FX team can help you access the most competitive exchange rates and make your stress-free.

The pound has risen against the dollar, as July has been the best month for Sterling in more than a decade, partly due to the dollar’s weakness. On Friday, the pound was at its highest level in almost five months. Positive news on Monday, also offered support to the pound which was also the best performing major currency of the past week, a result of better than expected economic data, global stock market recovery and expectations for a Brexit trade deal being agreed by October.

On Monday, the release of manufacturing PMI for July showed that the UK’s manufacturing sector continued its rebound in the wake of the coronavirus pandemic, with new orders growing at the fastest pace since late 2018.

UK Factory Output

UK factories increased production at the fastest rate in nearly three years in July, as plants reopened after the Covid-19 lockdown. The headline manufacturing PMI from IHS Markit and CIPS rose to 53.3 in July in the final reading, the highest reading since March 2019. The flash estimate was 53.6 and June’s 50.1. The output component was up at 59.3, the highest since November 2017. PMIs are an indicator of private sector activity and are given on a scale of 1 to 100. Anything above 50 signals growth, while anything below means contraction.

Signs of an economic recovery improved manufacturers’ sentiment, with confidence rising to its highest since March 2018. 62% of companies are now expecting production to be higher in 2021 and only 12% of firms are predicting a contraction. Sentiment strengthened across the consumer, intermediate and investment goods industries.

In terms of manufacturing employment, job cuts were linked to redundancies, natural wastage and aligning capacity with current manufacturing needs. Purchasing activity was increased but supply-chain disruption continued.  

Will pound remain steady this week? Thursday’s BoE policy meeting

The main event for Sterling this week will be Thursday's Bank of England policy meeting. At the June meeting, the BOE’s monetary policy committee kept the Bank rate at 0.1% but added £100bn into the economy by increasing its quantitative easing (QE) programme to £745bn. At the meeting on Thursday, it is expected that interest rates will be kept unchanged and markets will be watching for any signals as to whether quantitative easing will be expanded.

If the Monetary Policy Committee is optimistic about the economic outlook, Sterling could be supported. Asmara Jamaleh, Economist at Intesa Sanpaolo said: "Expectations are for unchanged rates and QE, although a potential display of openness to further monetary stimulus soon should weaken the pound, especially if the negative rate option is mentioned. An expansion of QE would have a smaller impact.”

Philip Shaw, chief economist at Investec, says:

“Our expectation is that the votes on both the policy rate and QE will be unanimous in favour of ‘no change’. But we expect the speed of gilt buying to be reined back further. The Bank of England is due to announce the reverse gilt auction sizes beyond 6 August and has hinted that the programme will run more or less to the end of the year. This suggests a weekly gilt purchase rate somewhere close to £4bn per week in order to meet the total £745bn target at that point. In trying to gauge the policy stance further ahead, we expect the committee to note that the economy has enjoyed further recovery momentum recently ... Welcome though this is, it of course reflects the response to the gradual unwinding of the lockdown. What is more critical is how the economy looks towards the end of the year as, for example, the CJRS (furlough scheme) expires. Moreover members will also note the signs of higher coronavirus infection rates on Continental Europe, in the US and to an extent the UK. The MPC’s assessment of the current indicators will probably be one of guarded optimism, but tempered strongly by the risks facing the economy further ahead. We think there is a strong chance that the committee sanctions a further £75bn- £100bn of QE in November.”

Transferring funds abroad? With more positive news coming out of the UK, the pound is expected to perform well. If you want to transfer funds to family and friends living abroad, get in touch with our friendly  Universal Partners FX team. UPFX’s dedicated foreign exchange specialists can help you access the most competitive exchange rates and make your currency transfers stress-free.

The British Pound has remained under pressure on Friday, especially after Thursday’s losses due to disappointing news that the Brexit negotiations have hit an impasse. Today’s (24/07/2020) better than expected retail sales did not help push the pound higher against its major rivals.

Brexit and Covid-19

Despite positive macroeconomic data, the coronavirus pandemic and concerns about the state of the Brexit trade negotiations have weighed on the pound. As the Guardian reported, on Friday morning the release of “the retail figures are doing little to support UK stocks with the FTSE 100 down 1.36% and the more domestically focused FTSE 350 down 0.6%.”

Positive Retail Sales’ Numbers

The easing of lockdown in mid-June helped UK retail sales beat forecasts in June. The Office for National Statistics has reported a 13.9% month-on-month rise in UK retail sales last month, marking an 8% uptick. Even for former Bank of England policymaker Andrew Sentence, the figures highlighted that the UK was on its recovery since the Covid-19 outbreak. The retail sales’ increase was the result of consumers spending for DIY and home improvement products due to the lockdown, with shops selling hardware, furniture and appliances doing particularly well, and reaching near-pre-lockdown sale levels.

With the easing of lockdown measures, consumers preferred real physical shops rather than online shopping, as the ONS noted that the proportion of online sales retreated from its record peak in May. Online spending, however, remained at 31.8%, higher than February’s 20%. UK total retail sales are now just 0.6% lower than February before the lockdown.

ONS deputy national statistician Jonathan Athow said:

“Retail continued to recover from the sharp falls seen in April, with overall sales now almost back to pre-pandemic levels. But there are some dramatic differences in sales across the retail industry. Food sales continue above their pre-pandemic levels due to the closure of cafes, restaurants and pubs. Online sales have risen to record levels, and now count for £3 in every £10 spent. On the other hand, clothing sales remain depressed and across the high street sales in non-food stores are down by around one-third on pre-pandemic levels. The latest three months as a whole still saw the weakest quarterly growth on record.”

With the exclusion of fuel sales, due to the lockdown and limited travelling, the level of sales was 2.4% higher than in February. According to figures, Britain’s economy shrank by more than a quarter in March and April and recovered slightly in May.

Is the UK economy recovering?

Former Bank of England policymaker Andrew Sentence said that the figures highlighted the UK was on its recovery since the Covid-19 outbreak. The Bank of England’s chief economist, Andy Haldane, has also pointed to a V-shaped recovery with the economy growing by around 1% a week, something that many of his colleagues have questioned. The British Retail Consortium said that spending among large high-street chains was 3.4% higher this June than last year.

As investors await the release of more figures to confirm expectations of a sustained economic recovery, the pound will remain under stress with Brexit as well as the growing number of deaths from Covid-19. If you are buying a home overseas or want to transfer funds to family and friends living abroad, get in touch with our friendly  Universal Partners FX team. UPFX’s dedicated foreign exchange specialists can help you access the most competitive exchange rates and make your currency transfers stress-free.

The British Pound pushed higher after investor sentiment improved due to the positive news that a deal between EU leaders have been reached. The euro also rose higher. The deal includes €1.8tn in spending, with a €750bn rescue fund to deal with the coronavirus pandemic. €390bn out of the €750bn will be made in grants.

Brexit trade negotiations a key driver for the pound

However, Sterling continues to remain under pressure as Brexit developments can thwart sentiment, while any updates from the Bank of England in relation to negative interest rates can also create further concerns.

Brexit negotiations will take place from Tuesday to Thursday and will cover such issues as trade in goods, fisheries, energy, transport and participation in certain EU programmes. The round will end with a plenary session on Thursday. The Brexit chief negotiator Michel Barnier will hold a press conference and investors will be watching to see any signs of progress regarding the latest round of EU-UK trade negotiations which will significantly boost Sterling.

Brexit trade deal and Tory rebellion

Boris Johnson faces a rebellion from Tories who want to pass an amendment to the Trade Bill that will allow the House of Commons and House of Lords to vote for a trade deal agreed between the UK and any other country.

After Brexit, the UK will need to renegotiate trade deals, something that has been celebrated by Brexiteers and criticised by Remainers. For many, such trade deals with countries like the US will sacrifice certain standards that were followed while the UK was under European legislation. After leaving the European Union at the end of this year, Britain will need to be extremely cautious when striking new deals that will be beneficial to its people rather than meeting the demands of political agendas. The government’s reluctance to allow its lawmakers and the people’s representatives to have a say in the negotiations, goes against its own promise of taking back control from Europe and giving it back to the UK people. Additionally, it denies any scrutiny and seeks to pass deals without a dialogue, enforcing laws that could have repercussions on the social and political lives of its citizens for years to come.

Post-Brexit trade talks on a standstill

EU officers have complained that trade talks have been “going round in circles”, and Downing Street said that “significant differences remain on a number of important issues.” This is what is also expected to be reiterated on Thursday when Barnier appears at the press conference, as both sides are anticipating a stalemate.

Another round of talks will begin the week of August 17, but Germany said that it won’t begin to focus on the negotiations until September.

Boris Johnson does not want talks to “drag on into the autumn”, but he will need to make some concessions to see any movement forward. “We’re waiting for the UK to move,” an EU official has said according to the Financial Times. Johnson has talked of trading with the EU like Australia, but he would need to secure a trade deal that will eventually confirm his competency as a Prime Minister and avoid a disorderly Brexit that could lead to calls for Scottish Independence.

If you are a business sending large amounts of funds 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.

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 British Pound could strengthen against the Euro and Dollar in the coming weeks if economic data continues to beat expectations, according to the latest projections by economists. But, analysts at Bank of America have told clients on Tuesday that Sterling was more like an emerging market currency. Lead analyst Kamal Sharma said that the currency’s movements the last four years since the UK Brexit referendum have been “neurotic at best, unfathomable at worst.”

Pound: An emerging market currency

It is not the first time that the pound has been described as an emerging market currency. Last year, in September, Bank of England governor Mark Carney said that Brexit-related volatility had made the pound act like an emerging market currency.

According to this week’s reports, “Sterling’s spreads and implied volatility – the future range investors expect GBP to move in – remain far wider than other major world currencies, such as the U.S. dollar, euro or Japanese yen, and resemble something closer to the Mexican peso.” Brexit uncertainty and the possibility of negative interest rates have hurt investor sentiment, BoA analysts said.

Better than expected data could offer support for Sterling

But Pound Sterling Live stated that if UK economic data continues to come in better than expected the pound will be supported. It did note, however, that “those looking for a stronger Sterling will continue to have to exercise patience in the near-term.”

With recent economic figures beating expectations and markets underestimating how quick the UK’s economic recovery will be, there is a “decisive shift in momentum.” Tuesday’s PMI data for June were better than expected with the Markit/CIPS Manufacturing PMI at 50.1, the Services PMI at 47, and the Composite PMI at 47.6, all above forecasts.

According to analyst at DNB Markets Kjersti Haugland, things are even more positive as there is a significant rebound of the economy. He said: "A literal interpretation of the figures suggests that manufacturing activity stabilised in June while service sector activity fell further, as a reading below 50 indicates a contraction compared to the previous month. However, some of the respondents may make a pre-Covid-19 comparison instead. Therefore, the sharp increase in June suggests activity is picking up quicker than expected.”

The British Pound does well when the UK economy is growing, unlike the US Dollar which strengthens when the economy is in decline due to its safe haven status. So, if the UK economy continues to grow and economic data comes out stronger than expected, then the pound will find support. This coupled with an easing of lockdown restrictions and the opening of businesses will help the economy recover. As the PM Boris Johnson announced on the 23 June, pubs and restaurants, campsites, hotels and holiday homes will reopen on 4 July. Other businesses such as spas, nail bars, casinos and swimming pools will remain closed.

However, a stronger Pound might be a distant possibility for now, as Sterling was the worst performing currency the past month out of the G10 and was “near the bottom of the pack which reflects a short- to medium-term trend is in place against many major currencies and this will prove tough to crack.”

 

With Brexit uncertainty to continue due to the ongoing negotiations and the harsh stance of the Bank of England both on quantitative easing and interest rates, the pound will remain volatile.

If you are a business sending money abroad or an individual transferring your funds and are worried about the pound’s volatility due to the current market conditions, please get in touch with Universal Partners FX. UPFX’s dedicated foreign exchange specialists can help you transfer your funds safely and maximise the value of your money.