Brexit: CBI Demands 3-Year Transition Period
Sterling lost its momentum against the US Dollar and the Euro, recording losses and not being able to resume the previous week’s excellent performance. The Bank of England’s (BoE) hint at raising borrowing costs from the record low of 0.25% in the next months has triggered a chain reaction of upward revisions regarding the outlook of the UK’s economy and the Pound’s value. However, businesses in the UK are increasingly worried that the British government won’t be able to strike a deal with the European Union (EU) and already ask for a three-year transitional period post-Brexit.
In the Eurozone, Eurostat published data which showed that inflation in August stood at 1.5% as analysts were expecting. This figure is far from the 2% target set by the European Central Bank (ECB) so the Euro didn’t receive any boost from the news. On the other side of the Atlantic, investors and traders are eager to hear what Janet Yellen, the Fed’s Chair, will say in the press conference after the Fed’s meeting on Thursday, regarding monetary policy issues.
Pound Sterling – UK Markets
Today, the Pound dropped against the US Dollar with the exchange rate set at $1.35. Sterling also lost ground against the Euro with the exchange rate set at €1.13. The British currency seemed to lose its momentum after hitting a one-year high against the US Dollar in the last days of the previous week.
The Confederation of British Industry (CBI) sent a letter to Theresa May, urging the Prime Minister to seek a three-year transitional period after Britain exits the European Union. As the CBI—Britain’s biggest business lobby group—said in the letter: “Our businesses need to make decisions now about investment and employment that will affect economic growth and jobs in the future. Continuing uncertainty will adversely affect communities, employees, firms and our nations in the future.” The CBI’s director general Carolyn Fairbairn said that UK businesses are deeply concerned about Brexit and that the prospect of a “no deal” with the EU feels all too real.
The change of the BoE’s monetary strategy, that brings closer the possibility of an interest rate hike in the next few months, seems to have forced analysts to revise forecasts for economic growth and the Pound’s value. The Centre for Economics and Business Research (CEBR) upgraded its outlook for the UK economy, suggesting that the worst squeeze in household income has now passed. The research centre expects that the UK economy will grow by 1.6% in 2017 and by 1.4% in 2018, which is much better than those previously estimated (1.3% and 1.2% respectively). HSBC also made an upwards revision to the GBP/USD forecast for the end of the year, predicting that the rate will hover around the $1.35 mark.
US Dollar – US Markets
The US Dollar retained its value against the Euro with the exchange rate set at €0.83. The US Dollar Index (DXY), which measures the value of the US currency against six major competitor currencies, moved higher at 92.06.
The main event of the week is expected to be the Fed meeting on Wednesday and Thursday, during which the board will take a decision regarding the benchmark interest rate. Economists believe that the Fed will keep its rate unchanged at 1.25%. A small inflation pick-up has made some investors believe that the Fed could raise interest rates in December. The probability given to such a move, according to surveys, is a bit lower than 50%.
Market experts believe that, although the central bank will not increase interest rates, it will present the plan for unwinding its massive $4.5tn balance sheet. Some of them suggest that Janet Yellen may even announce the start of such a reduction in the upcoming meeting. According to analysts, if the Fed proceeds to any unexpected move, the bond and currency markets will become volatile.
Euro – European Markets
The Euro remained stable against the US Dollar with the exchange rate set at $1.19. A series of positive data released by Eurostat didn’t boost the Euro.
According to Eurostat, inflation in the Eurozone in August came in at 1.5%, on a year-to-year basis, in line with expectations. Core inflation grew in August, on a yearly basis, coming in at 1.3% instead of the 1.2% that was anticipated. Eurostat’s data showed that energy prices increased by 4%, service costs by 1.6% and food prices by 1.4%, all being summer pricing effects. However, inflation in the Euro-bloc remains far lower than the 2% target set by the ECB.
Ardo Hansson, who is the Governor of the Bank of Estonia and member of the ECB’s board, said during an interview with Reuters that the ECB should gradually normalise its asset-purchase programme. Hansson said that the ECB should discuss making guidance symmetric, meaning that it should be ready to increase or decrease asset purchases. The Estonian banker noted that the ECB needs to recalibrate its stimulus and not just change the length and volume of the quantitative easing.
Other Currencies – Highlights
Sterling fell against the Australian Dollar, trading at 1.69 AUD. Treasurer Scott Morrison was in Beijing during the weekend to hold talks with Chinese officials aimed at tightening trade ties between the two countries. Representatives from the two countries talked about “a whole range of issues, starting off first and foremost with our combined commitments to grow our economies but also resisting against protectionism,” said Morrison. Two-way trade between China and Australia is worth more than $120bn.
The Pound dropped against the New Zealand Dollar, trading at 1.85 NZD. A Reuters report among economists showed that they expect a 0.8% GDP growth in the second quarter of the year, improved by 0.3% from the first quarter’s reading. Economists at BNZ said that the announcement of GDP growth on Thursday will have more eyes on it than usual since it will come just two days before parliamentary elections.
Sterling edged lower against the Swiss Franc, trading at 1.29 CHF. A Societe Generale report said that the Swiss National Bank (SNB) must continue to lag the ECB in policy normalisation and that the EUR/CHF exchange rate is expected to be dragged gradually higher by the appreciating Euro.