Ellie Allen

British Pound Weakens Further as Economic Growth Figures Disappoint and Brexit Worries Resurface


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Over the course of June, the Pound continued to be beset by weakness, with markets focusing on the ongoing uncertainty of the Brexit negotiations, as well as some weaker-than-expected economic data. It has been exactly four years now since the UK voted to leave the EU, and the Pound has been on a long-term downtrend ever since. The Pound is in fact now 17 percent lower against the US Dollar than it was prior to the referendum, and Sterling is still prone to volatility whenever negotiations occur and was the worst performing major currency in June. As Brexit negotiations restart this week, we can expect to see the Pound prone to further weakness.

BELOW-EXPECTATIONS UK GDP FIGURES NUDGE POUND LOWER

Sterling came under further pressure at the end of June when it was revealed that the UK economy had contracted by 2.2 percent in the first quarter – which was worse than the estimate of a 2 percent contraction, and represented the greatest fall in 40 years. At the same time it was revealed that business investment in the UK economy had fallen by 0.3 percent, which was the second consecutive quarter of contraction. These figures served to further limit Sterling’s value in relation to the other majors.

US DOLLAR FALTERS BEFORE RE-STRENGTHENING AS RISK OFF INCREASES DUE TO RESURGENT COVID-19 FEARS

The US Dollar found itself on a steep downtrend over the first part of June, with the US Dollar Index (DXY) sinking as low as 95.96. Much of this weakness was attributed to increased economic optimism as countries re-opened their economies and global trade picked up, fuelling demand for risk at the expense of safe havens. However, the second half of the month was a different story, with fears of a resurgence of Covid-19 cases halting the flow out of safe havens and causing USD to stabilise.

By the end of the final trading day of the month, GBP/USD had hit a high of $1.24 as UK Prime Minister Boris Johnson announced plans for a ‘Rooseveltian New Deal’ to boost the economy as it emerges from the Covid-19 lockdown. The PM promised to ‘take a scythe through red tape’ and spark a construction boom. Traders seemed to find positive sentiment in his words, despite a number of high profile job losses in the aviation and retail sectors being announced around the same time.

Earlier, Federal Reserve Chair Jerome Powell and US Treasury Secretary Steven Mnuchin warned that a resurgence of Covid-19 cases in America could force consumers to withdraw from economic activity. Testifying before the House Financial Services Committee, Powell stated “The path of the [US] economy is highly uncertain,” with his comments being immediately seized upon by USD bears as evidence that ‘bad news’ may now also be ‘bad news for the US Dollar’ in the absence of further risk-on sentiment.

Meanwhile, the Canadian Dollar appreciated against the Pound during June, following something of a rally in oil prices over the same period. GBP/CAD was trading at CA$1.68 by the end of the month, having slipped from CA$1.70 at the start as WTI oil prices hovered above the $40 mark.

EURO MAINTAINS STRENGTH OVER STERLING AS BREXIT NEGOTIATIONS REMAIN ON A KNIFE EDGE

The Euro remained strong in June, with GBP/EUR sinking from €1.12 at the start of the month to end up at €1.10 by the end. This represents a three-month low for GBP/EUR, which has been devaluing relentlessly since mid-April. Sentiment towards the Euro has been suffering from the same barrage of negative economic news that has affected the Pound, with the added downside news that the US is preparing to impose $3.1bn of tariffs on EU exports. Nevertheless, this negativity was outweighed by the gravity of the UK-EU Brexit talks, with both Boris Johnson and EU chief negotiator Michel Barnier hardening their stances over their respective positions.

Mr Barnier said that British negotiators will fail in the efforts to insulate the City of London from the worst consequences of Brexit, adding that UK demands were ‘unacceptable’. This position rattled market confidence in Sterling, despite Boris Johnson’s optimism that a deal would be struck soon.

The next test for the Euro will come on 17 July when the EU leaders meet in Brussels to discuss the proposed Covid-19 bailout package. Last week all 27 leaders failed to agree on the package, revealing old fractures among the bloc members.

AUSTRALIAN DOLLAR MARCHES HIGHER AGAINST THE POUND DESPITE COVID-19 RISK JITTERS

The Pound continued the downtrend it has been on since late March against the Australian Dollar, closing the month at AU$1.80 – a slip of 5c since the end of May.

The Australian Dollar has managed to hold near its best levels all year against Sterling, despite a lack of fresh support for AUD. The currency continues to be driven higher by hopes of an economic rebound from the coronavirus, with investors overlooking the latest concerns about fresh localised virus outbreaks in the country.

There was a late resurgence in the GBP/AUD exchange rate at the tail end of the month when UK PM Boris Johnson announced a sizeable infrastructure plan to help the UK economy, but it did little to halt the overall decline in the pairing’s value. Risk sentiment will be key over the coming weeks in terms of seeing whether Sterling can halt its three-month decline against the “Aussie”.

WHAT TO LOOK OUT FOR IN JULY

Forex markets will continue to focus on risk during July, with any news of further outbreaks of new Covid-19 cases liable to send traders hurrying into safe havens such as USD. Should this be the case, we can expect to see further USD stabilisation.

With the second quarter now having drawn to a close, markets will be waiting to see the full extent of the damage caused over the critical April-June period by the Covid-19 lockdowns. While none of the data is expected to be good, any further shocks to economic growth could have the effect of halting the recent rise of the Australian Dollar, and further may limit the upside potential for the Pound.

For the Pound Euro pairing, intensified Brexit negotiations will likely provide direction for GBP/EUR, with any tentative deal likely to cause a surge in Sterling support. That said, the chances of any deal being struck currently appear to be slim, with any lack of progress likely to weigh on GBP/EUR. Another major factor for the Euro will be next week’s inflation data, with analysts keen to see if the bloc has avoided a further month of deflation.

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