Pound Sterling Looks to Extend Recent Strength against Euro and Dollar, EU-UK Brexit Deal Pessimism Looks Misplaced

– Economic improvements support GBP gains
– GBP was Julia's best performing currency in July
– New timeline shows that the Brexit talks should continue until October

David Frost

Above: File of British negotiator David Frost. Picture © Gov.uk, 10 Downing St.

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The British pound was the strongest major currency last week. Growth came from a combination of better-than-expected domestic economic data, a continued recovery in global equity markets, and expectations that a trade agreement between the EU and the UK should be reached by October.

The strength surprised many analysts that we are following, and many expected that the British pound would remain a straggler and prolong the multi-week devaluation surge that had occurred between April and June at most sterling exchange rates, with some saying the end The growth in July was just a technical phenomenon at the end of the month.

However, the fact that earnings were held in late July through August would dispel the view that the strength is only due to end-of-month flows: the pound to euro exchange rate will be at 1.1120 at the beginning of the new week traded during the pound to euro exchange rate. The dollar exchange rate is quoted at 1.3093 after rising to 1.3171 on Friday.

"The latest economic data has certainly had something to do with Sterling's success. Not only the UK numbers that all met or exceeded forecasts, but also some of others that looked terrible by comparison. Britain's Ecostat highlights were the preliminary purchasing managers on Last Friday "Indexes with a composite index hit a five-year high and mortgage approvals quadrupled in June," said a statement from Moneycorp, a London-based foreign exchange broker.

GBP ends last week with a high "width =" 750
Above: GBP outperformance at the end of the previous week.

The main domestic event for Sterling this week will be Thursday Bank of England Policy meeting where interest rates are expected to remain unchanged, but markets are looking for signals from Threadneedle Street to see if quantitative easing is expanded again.

The key question will be whether the emerging economic outperformance has made itself felt to the Monetary Policy Committee to the extent that they have a more optimistic tone about the outlook.

If so, we would expect the sterling to find some support from Thursday's event, as a stronger economy may mean future quantitative easing based on the FX rule of thumb that suggests quantitative easing increases = a weaker currency.

While the Bank of England will draw the forex market's attention this week, we continue to believe that the main driver for the coming months will be the result of EU-UK trade negotiations that we believe the markets may have are too pessimistic on a pro-sterling result.

"Sterling also appeared to receive support from reports that EU Brexit negotiator Michel Barnier is confident that a trade deal with Britain will continue to be possible. This was hardly a new perspective, but reminded investors of their underlying assumption that Britain won't intentionally submit. " The no-deal Brexit bus and the EU will not drive it forward, "Moneycorp says.

The markets remain nervous that the two sides will not reach an agreement by autumn and quote the numerous briefings on both sides that the talks are coming to a standstill. However, we believe that this is a symptom of both sides trying to maintain pressure and appearing unwilling to withdraw.

Pound performance in July "width =" 750

Above: GBP performance in July

Compromises and an agreement were probably only reached at the last moment, which is expected to be a meeting of EU leaders in October.

Indeed, it is the last thing to support this view Announcement setting of the week the schedule for further rounds of negotiations showing that the last scheduled round will end in Brussels on 2 October.

The market pessimism on this matter, which was certainly noticeable during the sterling decline from April to June, therefore appears to be somewhat out of place, and the recent outperformance of the currency can best be explained by the view that the Foreign exchange market participants come to this view The two sides will agree.

"In our central scenario, we now expect the UK and the EU to reach a" bare "trade deal on goods by the end of 2020. The GBP is undervalued and oversold, but the weak growth prospects and uncertainty about Brexit could maintain this almost all year round about close to lows, "said Valentin Marinov, head of G10 FX Strategy Credit Agricole.

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