On Friday, 29 September, the GBP got a much-anticipated boost: Brexit negotiations are finally making headway in their fourth round of talks. Brexit secretary, David Davis and his European counterpart, Michel Barnier indicated that Prime Minister Theresa May hit a chord in her recent Florence speech. During the third round of Brexit negotiations, currency traders were distraught by the lack of progress and shorted the sterling en masse.
Now that negotiation has restarted, there is an air of optimism about the UK’s prospects vis-à-vis extrication from the Eurozone. However, certain sticking points remain, and the chief European negotiator, Michel Barnier is of the opinion that the remaining issues could take several months to resolve.
Singh Pravid, an analyst from SNP investments is buoyed by the recent negotiations, indicating that both sides have made considerable progress. ‘One of the stumbling blocks remains how the ECJ (European Court of Justice) will have jurisdiction over European Union citizens after the UK officially leaves the EU in April 2019. It is likely that Brexit negotiations will focus on judiciary and budgetary conditions required for the UK to leave the EU. But for now, this is good news for the GBP.’
If the Brexit proves to be economically feasible, the GBP will rise accordingly. Brexit-related uncertainty will drive the GBP lower, but for now, the short-term prognosis is a bullish GBP. Heading into October 2017, the GBP/USD pair was trading at 1.3392, up from 1.23 on January 2, 2017, This represents a 9.77% appreciation of the GBP at a time where the UK economy has been on the ropes. However, at the time of writing, the pound was trading at 1.3253 versus the US dollar.
The next round of Brexit negotiations will begin on Monday, 9 October 2017. For now, all signs are positive for the sterling given the political will of the UK government to reach a negotiated settlement. Journalists have referred to the stark contrast between successive rounds of Brexit negotiations as ‘chalk and cheese’, and it is clear that the nature of Brexit negotiations has a direct bearing on the performance of the GBP.
Robust Chinese Data
Currency traders and speculators are less focused on the precise dates of these successive rounds of Brexit negotiations, and more on the underlying tone that is struck between the UK and the EU negotiators. It’s worth pointing out that the EUR has been somewhat wobbly of late, with weakened trading activity across Asia. This resulted from the Catalonia independence vote in Spain. After rioting broke out, Spanish police worked to quell the violence with rubber bullets and batons. However, investors held off on selling the EUR and purchasing safe-haven currencies.
Both the USD, and the JPY steadied and there was little activity in the gold markets. The big news comes from the world’s second-largest economy, China which reported strong manufacturing growth in September. PMI data indicated September growth figures of 52.4, up from 51.7 a month earlier. A sizable reduction in capital requirements was made for Chinese banks, freeing them up to lend more money to stimulate the Chinese economy. These economic moves have helped to boost Asian trading activity, notably the CNY (Chinese Yuan) and commodities like copper, iron ore, Brent crude oil, and the like.
Strong economic growth in China is good news for Asia-Pacific, notably the Australian economy. This week, the ASX (Australian Share Market) is expected to perform strongly on the back of China’s PMI data. The world’s #1 economy – the US – is expected to enjoy a golden patch if US corporate tax cuts are passed. According to data from the Chinese economy, we can expect global economic activity to continue expanding, with negligible effect on inflationary pressures.
This article was originally posted on FX Empire
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