EURGBP, Daily
Cable has printed a seven-month high at 1.3147 and EURGBP a two-and-a-half-year low at 0.8430. Sterling has been continuing to unwind its Brexit discount at a pace. With just a week to go until the UK’s general election, it’s looking increasingly unlikely that Labour will close the popularity gap with PM Johnson’s Conservative party. Politico’s poll track has the Conservatives with 43% support, unchanged from Monday, and Labour with 33% support, also unchanged from Monday. The gap is seen as being beyond the margins of error in polling methodology, and sufficient to return Johnson as prime minister with a working majority.
The Pound in the BoE’s real trade-weighted measure remains 8% down on levels prevailing ahead of the vote to leave the EU in June 2016, having rallied by just over 9% from the multi-decade low that was seen in mid August.
Assuming the Conservatives win and return to the House of Commons with a working majority, the Brexit deal will almost certainly be ratified and Brexit will be delivered in January. The UK would then enter a one-year transition period, which would likely be extended for up to two years beyond that, to allow time for a trade deal to be negotiated between the UK and EU (negotiations to date have focused on divorcing terms).
During this period, not much will change in practical terms, with the UK remaining in the EU’s single market and customs union. While the Pound, in this scenario, will likely remain bid, there are reasons not to get too bullish on the UK currency, one being the risks of the UK devolving, and another being the realities of trying to strike trade deals in a more protectionist world. The whole issue of the UK’s free, publicly funded National Health Service is always a hot topic at UK general elections and 2019 is no different; the whole issue of if sections of the service can be better serviced if in the private sector and if the NHS would be part of trade negotiations with other countries, the USA in particular, continues to rumble on, potentially undermining PM Johnson’s seemingly unassailable lead in the opinion polls.
EURGBP has been trending lower from the highs on August 12 (0.9324) and is now into its fifth consecutive month down, with the pair finishing lower 13 of the last 17 weeks. The last big down day (October 10) saw the pair breach the 200-day moving average and finally reject 0.9000. The rapid move to 0.8600 provided support until November 11, and yesterday (December 4) the big psychological 0.8500 was breached. Below here takes the pair back to June 2016 and Referendum month. Support appears at 0.8330, 0.8000 and the 200-period moving average and June 2016 low at 0.7600.
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Stuart Cowell
Head Market Analyst
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