Europe agrees Brexit, but will the UK?

• Plan to strengthen Euro’s global role

• Italian government giving ground on budget

• Pound and UK economy buffeted by Brexit

The Pound has fared better against the Euro during the last month. The ups and down of the Brexit saga and the European economy have produced some swing, but not as much as other major pairing. The high of 1.154 in typical mid-market rates came on 15th November with increased optimism over a Brexit deal, while the low of 1.118 was reached on 4th December, as British MPs began their five-day Brexit debate.

Euro to take on the US Dollar?

The Euro is set to take up a “stronger international role” in a bid to challenge the US Dollar as the world’s reserve currency. The European Commission has published plans to use the Euro more in “strategic sectors, including energy, commodities and aircraft manufacturing. The policy change comes amid concern over “recent challenges” to “international rules-based governance and trade” following the US-China trade wars. Euro chiefs are calling for a new EU payment system and for more contracts to be conducted in Euros rather than US Dollars, which has become “the predominant currency for derivative operations”. The proposals are set to be discussed by EU leaders at a summit meeting in Brussels later in December, but at the moment, certainly for the shorter term, this seems an unlikely scenario.

Italian government giving ground on budget

There are reports that the Italian populist government is starting to give ground over its controversial 2019 budget proposals. At time of writing, it is believed that more than 50 changes have been made to the budget, which will go forward to the Italian parliament before going back to the European Commission. The Italian government had proposed a budget deficit of 2.4% of domestic product for each of the next three years, three times higher than planned by the previous government, but this was rejected by European Union chiefs and finance ministers as being against rules designed to protect the Eurozone. Italy’s debt of 133% of Gross Domestic Product (GDP). In a statement, the Eurogroup says, “We support the Commission assessment and recommend Italy to take the necessary measures to be compliant with the SGP. We also support the ongoing dialogue between the Commission and the Italian authorities.” Italy’s Prime Minister, Giuseppe Conte, is hopeful that a deal can be agreed with the European Commission.

Pound and UK economy buffeted by Brexit

The issue dominating the Pound against all major currencies is, of course, the UK’s relationship with Europe and what will happen concerning Brexit. The UK is due to leave Europe on 29th March 2019. Although European chiefs have agreed an exit plan, the proposal is not as popular with UK MPs. A five-day debate is currently raging, ahead of the vital vote in the House of Commons on Tuesday 11th December. Ahead of that, the British government lost an historic motion that found it in Contempt of Parliament for not publishing full legal advice over Brexit, as had been previously agreed by MPs. The government had published only a summary of the legal advice, arguing that the full advice was confidential.

House of Commons leader, Andrea Leadsom, says that the government will comply and publish the advice in full. On top of that, comes news that the UK could still decide to stay in the European Union. Following an inquiry from Scottish MPs, the European Court of Justice's advocate general has said the UK should be able to cancel its withdrawal from the European Union without the consent of other member states. The view is a non-binding opinion from advocate general Manuel Campos Sanchez-Bordona and the European Court of Justice will deliver its opinion later. All that… and the main Brexit vote by MPs is still to come!

There was some good news for the UK government earlier, with the European Union approving a Brexit deal. The 585-page withdrawal agreement covers citizens’ rights, the ‘divorce’ payment and the controversial ‘backstop’ for the Irish border, which seeks to retain an open border on Ireland in the event of a no-deal Brexit. The bad news is that the arrangements are deeply unpopular with MPs, who are voting on the measure on Tuesday 11th December. Since the terms of the agreement were first made public, there have been resignations by UK government ministers. In addition, disgruntled Conservative MPs have been calling for a vote of no confidence in Mrs May, which can be actioned when 48 letters are sent to the backbench body, the 1922 committee.

However, at the time of writing, the rebels remain short of their target and Theresa May clings on to power. If the deal fails, it is anybody’s guess what happens next. Mrs May could amend the agreement and with the support of the EU and the cabinet, bring back a revised deal to parliament. On the other hand, Britain could leave the European Union in March 2019 with no agreement. If more unhappy MPs write to the 1922 committee, Theresa May could face that no-confidence vote and a leadership contest, or she could resign and call a general election.

Whatever decision is taken, the UK economy and Pound will be significantly affected. In Quarter 3, the UK GDP had its best showing for nearly two years, rising 0.6% over the previous quarter and 1.5% up year-on-year. However, that could be the last piece of good news for some time. Most of the growth came in July, when England was enjoying a decent football World Cup run and warm weather boosted retail sales and the construction industry. However, the National Institute of Economic and Social Research predicts the UK economy will grow just 0.4% in the last three months of the year. In the event of a soft Brexit, things could be worse, with the UK economy performing worse than any country in Europe at 1.1% in 2019 and 2020, according to European Commission forecasts. A no-deal Brexit is set to be even more damaging, with Bank of England Governor Mark Carney warning that in a worst-case scenario, the UK economy could fall back by 8% after Britain leaves Europe, with the Pound dropping 25% and house prices down almost a third. It’s no wonder the FX markets are watching the developments carefully for any reaction by the Pound or Euro!

Guidance for buying Euros

GBPEUR is still in the same 12 month range. Very little has changed technically. Buyers should target 1.1400/50 and only be truly concerned on a break of 1.1000. In the short term, 1.1100 should provide immediate support, but the market is trading sideways and looking for a catalyst to provide direction. Momentum indicators are flat and it is difficult to get too excited until we are closer to the margins of the recent trading range.

Guidance for selling Euros

Again, the market is still a little lacklustre. Sellers can target sub 1.1100 in the short term. GBPEUR is still trading within the 12 month trading range and unless we see a break above 1.1450/1.1500, there is little reason to panic.