The Pound enjoyed election highs last month, before coming back down to earth, writes currency specialist Ben Scott of Global Reach.
Towards the end of the year, markets usually quieten, but 2019 had quite a different effect.
Brexit has been Sterling’s primary driver for some time, and so the prospect of an election to give Britain’s departure some direction bolstered the Pound as polls predicted a Conservative win.
As the exit polls were released, and a Tory victory looked in sight, the Pound jumped across the board, reaching a near three-and-a-half-year high versus the Euro in the 1.20 interbank region.
However, just days before Christmas, the Pound sank to a two-week low versus the Euro, as the reality of a potential hard Brexit at the end of 2020 weighed on the British currency.
Boris Johnson is now expected to pull the UK from the EU this month and spend the remainder of the year organising trade agreements to allow Britain to leave at the end of 2020.
The New Year has brought fresh geopolitical tensions and risk aversion to the markets, as well as some extra Sterling pressure as markets anticipate a hard 12 months ahead.
However, some brighter economic data showing an upswing in the UK’s most dominant sector, Services, has bolstered the British currency on occasion.
The Conservative Party has stated it will not extend the transition period beyond the end of the year, and the EU has suggested that June will be the last month that the UK could ask for an extension.
Should a deal not be reached by the end of the year, Britain would be subject to World Trade Organisation trading terms, which could negatively impact the economy further.
Not only will the election be in focus, but the upcoming Budget on March 11th will also be in focus to see whether the Conservatives offer an extra boost to the recently stuttering economy.
While markets hope Brexit clarity will restore some investment in the UK, which could support stronger growth moving forward. Economic data has taken a backseat while Brexit headlines dominate the news, but the election result was received well by markets, and many hope will offer enough Brexit direction to see the UK economy get back on track.
In terms of central bank news, December saw new European Central Bank Chief Christine Lagarde follow market expectations in her first monetary policy meeting and vote to keep rates on hold. However, Lagarde did suggest a new strategic review of policy would be an extensive exercise.
Meanwhile, Bank of England Governor Mark Carney is enjoying his last month at the helm before he leaves on January 31st. Head of the Financial Conduct Authority, Andrew Bailey will replace Carney, as the 121st Governor, after Carney extended his tenure to offer some stability to the Bank and UK economy during Brexit extensions and delays.
If UK growth doesn’t pick up in coming months, the Bank may have to consider cutting interest rates once again, putting the new Chief in a delicate position at the start of his tenure. Rate cuts may serve to support the economy, but the Pound will likely soften in response.
On the 8th January, the Pound was trading in the interbank region of 1.18 versus the Euro.
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