Light at the end of the Brexit tunnel?

• This week’s Currency Insight is a Brexit special…
• Pound picks up on positivity
• The uncertainty continues…
• What to watch for this week...

This week’s Currency Insight is a Brexit special…

Brexit has been buffeting the Pound… but it appears that there may be light at the end of the tunnel… Disappointing data from all areas of the UK economy, combined with the threat of a no deal Brexit becoming all the more possible, started strangling Sterling’s strength throughout the week, seeing the Pound fall against the US Dollar, in particular. But the Pound perked up on hope that some form of deal could be reached, following the UK Prime Minister’s latest visit to Brussels.

Theresa May was in Brussels on Thursday, meeting lead Brexit negotiator, Jean-Claude Juncker, in what was described as "robust but constructive" talks to try to stop the UK being trapped in the Irish backstop.

Mrs May also spoke to European Council President, Donald Tusk, who apparently stated there is a "special place in hell" for those who campaigned for Brexit without a firm plan to deliver it.

Mrs May says if legally-binding changes are made to the backstop arrangement to prevent the UK being “trapped” in any deal, she can get the UK parliament to approve Brexit.

The European Union (EU) still insists that it is not budging on further negotiations. The EU says no changes can be made to the existing Brexit arrangement, but says it could alter the non-binding relationship document and aims to be more ambitious in ongoing discussions with the UK.

Mr Juncker underlined in a joint statement “that the EU27 will not reopen the withdrawal agreement.” But he "expressed his openness" to adding words to the non-binding future relationship document - that also has to be backed by MPs - to be "more ambitious in terms of content and speed."

Pound picks up on positivity

An improvement in the Pound’s fortunes appeared post-press release, however, as markets started to see a sliver of light at the end of the tunnel.

Mrs May says she has "set out very clearly the position from Parliament that we must have legally binding changes to the withdrawal agreement in order to deal with Parliament's concerns over the backstop."

She adds, "What I see and hear from leaders is a desire for us to work together for us to ensure that we can deliver the UK leaving the EU with a deal."

The uncertainty continues…

Will the UK’s exit from the EU be delayed? Will we crash out with no deal? Will there be fruitful negotiations at the very last minute? We all watch and wait for the next developments.

What to watch for next week…

If a new deal is not reached by 14^th February, there will be another Meaningful Vote as a Valentine’s gift for Members of UK Parliament. If a deal is still not decided upon, another vote will take place one month later.

Even though MPs say they want a deal, if none can be reached the default position is that Britain will leave the European Union on 29^thMarch without agreement. 

Mark Carney warns of danger of Brexit fog and UK recession

As many expected, Bank of England (BoE) Governor, Mark Carney, once again voiced economic concerns bound to Brexit. He issued a stark warning that unless Theresa May can secure a Brexit agreement, the UK economy could go into recession.

The BoE already downgraded UK Gross Domestic Product (GDP) by 0.5% to 1.2% in 2019 – the slowest in a decade, due to Brexit fears.

Mr Carney, says the “fog of Brexit” is causing short-term volatility and tensions for business, households and financial markets.

As the chances of a no-deal Brexit increases, limiting growth, so does the risk of recession, he told a press conference after the launch of the February 2019 Quarterly Inflation Report.

Poor Pound…

Afterwards, the Pound dipped slightly against the US Dollar, from 1.298 to 1.296, but started to pick up again towards the end of the day and on Friday morning following Mrs May’s joint statement with Mr Juncker.

Halo Financial Founding Director, David Johnson, explains, “The Bank of England comments about downgraded growth and the chance of recession were offset by hopes that Theresa May could still reach an agreement with the European Union and avoid a no-deal Brexit, with all the economic dangers it would bring.”

Mr Carney says, “How these tensions are reconciled once the fog lifts will have consequences for the path of monetary policy in ways that cannot be predicted in advance. To forecast the economy and set monetary policy accordingly, the MPC must make a series of judgments.

“First, given the dynamics of the negotiations, we are now assuming uncertainty remains elevated for a while and that financial conditions stay tighter for longer. Second, we have downgraded our forecast for UK weighted global GDP by 0.5 per cent. Over the past year the global economy has transitioned from robust, broad-based expansion to a widespread slowdown, with all major regions currently decelerating in the wake of tighter financial conditions and rising trade tensions.”

Mr Carney concludes, “Although it isn’t clear how long the fog of Brexit will last, whatever the weather, the Monetary Policy Committee (MPC) will always act to achieve the 2% inflation target, consistent with its remit.”

What else is happening in the world?

Good news from German data

Well, Europe got a welcome treat in the form of the German Trade Balance, which was much better than expected, after dismal data has reinforced worries of an economic slowdown.

Australian Dollar dips

The Australian Dollar took a hit on economic worries, too, as Australia’s central bank downgraded Aussie economic growth forecasts, although it’s all good news for Australian exporters.

US Dollar also drops, then picks right up again

And the US Dollar also fell following former Federal Reserve Chair, Janet Yellen’s comments about the potential implications of the global economic slowdown on the American economy. US China trade tensions remain a concern, but the strength of US employment and a number of other positive data results pushed the USD back up again.