Market News & Insights
9 October 2018

“There is a Difference Between People Talking Optimistically About a Deal and a Deal Being Done”

Sterling shows little signs of stalling on its recent gains against the euro as GBPEUR has broken 1.14 this morning for the first time since June this year. This means that since August’s low at 1.1006 GBPEUR has gained over +3.5%. So what has actually happened over the past 41 days? The reality is that if you break it down – nothing. Yes, we’ve had statements from both the U.K. and EU officials alike on the ‘progression’ of Brexit talks and how both parties want to bash out a deal. Comments from President of the EU Council Donald Tusk stating that the UK has been offered a ‘+++’ trade deal and that the EU want to achieve a deal have been good to hear yes, but have confirmed absolutely nothing. And regardless of what is coming from the EU let’s not forget about the fact that British Prime Minister Theresa May still faces a colossal challenge in getting her Chequers plan through her own government.

I’m no pessimist – but the reality of what happens on 11pm March 29th 2019 is impossible to predict based on what has been established to date and on the contrary the downside risks far outweigh the upside in the talk’s current climate. Yesterday saw Brexit Secretary Dominic Raab hint that any breakthrough in Brexit negotiations may not be as imminent as markets might be expecting, while also insisting that the next move lies with the EU. His comments were reiterated by government spokesman James Slack who said that “there is a difference between people talking optimistically about a deal and a deal being done. There can be no withdrawal deal without a precise future framework.” I couldn’t have put it better myself.

So what exactly is driving sterling? The short answer is market sentiment. If sterling is the measure of the Brexit negotiation’s condition then market sentiment has become the weight dictating its metric value. What’s happened over the past 41 days is the equivalent of quitting your job with no income but seeing your account balance go up based on the banks positive interpretations of your future employment prospects. Just like sterling, you’d be laughing.

Just across the channel the primary focus remains to be Italy’s ever growing anti-EU sentiment. Matteo Salvini, Italy’s far-right minister, described top EU officials as “enemies of Europe” while accusing financial speculators of seeking “the failure” of countries like Italy which triggered a sell-off that sent Italy’s borrowing costs to a new four-year highs. Salvini, sitting alongside failed French candidate Marine Le Pen, utilised the opportunity to criticise EU leaders in their general approach to Italy’s economic position in the bloc while also making comments on a rumoured German immigrant repatriation plan back to Italy by stating that he would close the countries airports. While Italy’s debt deficit and GDP budget is the main concern from EU officials, turning up in public alongside notorious anti-EU figures such as Le Pen is not the most positive of signs for investors looking for positive signs on the euro. With the US offline with Columbus Day, yesterday saw little movement from the dollar as a euro selloff saw the cross drop back below 1.15 with lows at 1.1461, losing over .5% over the day. With the US set to come back online markets will look to see how the dollar responds to the International Monetary Fund’s lowered forecasts for global growth. For the first time in two years, the IMF downgraded their growth forecasts to 3.7% expansion this from original forecast 3.9% last year. US growth is forecast at 2.9% unchanged, while the Eurozone is expected to grow 2% this year, down from an initial 2.2% estimate. The dollar has started the day well against both the euro and sterling as GBPUSD drops back below 1.31 with lows at 1.3030.