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British Pound in Great Form with Brexit Troubles Fading

Constructive Brexit talks between UK politicians have imparted a sense of renewed optimism that has lifted the British pound to a 2-week high against the dollar and to a 3-week high against the euro.

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A “really constructive” discussion between the Conservative and Labour parties suggests that Prime Minister Theresa May is warming to the investor-friendly idea of a permanent customs union with the EU and as such has lifted the British pound to multi-week highs against both the dollar and euro, at $1.31 and €1.165.

May’s concession on a customs union would be extremely unpopular with members of her own party but some reports on Wednesday suggested that senior government officials were hopeful that a cross-party agreement on a way forward — one that would include a customs union of sorts — might come as early as next week.

GBP to EUR - 1 Week chart to 01 May
GBP/EUR - 1 Week chart to 01 May

The UK’s withdrawal from the EU was originally scheduled for March-29 but with gridlock in Parliament, at the eleventh hour the Kingdom was granted a Brexit extension until the end of October.

Foreign exchange rates are reflecting a perceived reduction in downside risks to Britain’s currency — Wednesday marked sterling’s fourth consecutive day of gains against the dollar — though some risk clearly remains, which makes March’s high of $1.338 the likely ceiling to currency appreciation in the short term.

While the threat of “no deal” has been eliminated for some, a very real risk that might send the pound to levels as low as $1.24 according to one UBS strategist is a general election — something that the Labour party has said it will pursue if it cannot force changes to Theresa May’s Brexit deal. With Labour consistently ahead in the polls, the heightened levels of uncertainty that would precede an election would undoubtedly force many investors to abandon their sterling positions in favour of safer currencies.

GBP to AUD - 3 month chart to 01 May
GBP/AUD - 3 month chart to 01 May

Should the UK go on to find a cross-party consensus and then strike a deal with the EU, most analysts believe that sterling will be 7 to 11 percent higher at levels between $1.40 and $1.45. In the week leading up to the UK’s referendum on EU membership in June 2016, sterling averaged $1.462.

Unlike some other major central banks such as the Reserve Bank of Australia (RBA), the Bank of England is not expected to adopt an explicit (or even suggestive) dovish bias when it delivers its closely-watched Inflation Report on Thursday since that could exert unwanted pressure on the pound. Also on Thursday, the BoE will announce its latest decision on interest rates, which are universally expected to be left unchanged at 0.75 percent.

 

Further Reading

 

Expensive Holidays for Brits After Pound Slips for Record 13th Day; What Next?

The British pound fell on Wednesday for a record thirteenth consecutive day against the euro. The currency is taking a Brexit-induced beating days before May’s half-term school break — a popular time in the UK for family holidays.

Last update: 22 May, 2019

Aussie Dollar Might Reach 10-Year Low of 65¢ After Decline Accelerates

The Australian dollar is now worth only 68.6¢ after another week of heavy losses, and now one senior analyst has predicted exchange rates in the “mid-60s” this year – rates not seen since 2009.

Posted: 18 May, 2019

Banks Fined €1.1 Billion for Currency Manipulation

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Posted: 16 May, 2019

  

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Please note that the opinions of our authors are their own and do not reflect the opinion of Best Exchange Rates and should not be taken as a reference to buy or sell any financial product.
 

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