09/01/2020

Sterling remains volatile due to uncertainty


GBP

GBP erased early gains against both EUR and USD on Wednesday as the European Commission President warned the UK that there is not enough time for a full UK-EU deal by the end of 2020.

Sterling opened Wednesday’s session on the front foot and moved to a high of 1.3165 against USD and 1.1823 against EUR. This move was a result of investors returning to sterling from the traditionally more safe haven currencies, as market expectations of further escalation in the US-Iran conflict were low.

GBP was back under pressure as the European Commission President Ursula Von Der Leyen met with Boris Johnson at Downing Street yesterday to open UK-EU trade talks, stating it was ‘virtually impossible’ to assume a trade deal will be agreed by the end of the year. This was echoed by European Central Bank policymaker Klaas Knot, who commented that a ‘hard Brexit at the end of 2020 remains a possibility’.

With Johnson reluctant to grant an extension to the transition period at the end of the year, concerns remain that the time frame left to negotiate a deal with the EU is too short, and that the UK could revert to World Trade Organisation rules. A move which would be undesirable for the UK economy and GBP.

Bank of England Governor Mark Carney hinted to future rate cuts. In a recent interview, Carney commented that the monetary policy is not a spent force and that his successor, Andrew Bailey, has the tools to cut interest rates from 0.75% to 0% if necessary. Carney also went on to suggest that the global economy is heading towards a liquidity trap, which will undermine the effectiveness of central banks to avoid a future recession.

Key announcements

EUR – 10:00am: Unemployment rate Nov – Previous 7.5% Expected 7.5%.
USD – 13:30pm: Initial Jobless Claims – Previous 222k Expected 220k.
GBP – 15:30pm: BOE Governor Mark Carney.


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