The recent regional election results in Bavaria were a disaster for the Christian Social Union party, who experienced their worst result since 1954. The Social Democrats didn’t fare too well either, with their vote halved and the party coming in below the far-right Alternative for Germany. Surprising as the results were, it is the latest in a long line of populist parties across Europe receiving levels of support not seen for some time.

As the eurozone’s third-largest economy, Italy’s situation is arguably the biggest threat to Europe, with the rise of anti-immigrant party Lega.Lega’s leader, Matteo Salvini, has already clashed with Brussels over Italy’s budget plans and his anti-immigration policies, but support for him and his party has almost doubled since the elections in March.Perhaps most worrying of all is the fact that Salvini has joined forces with Steve Bannon in an attempt to spread his politics across Europe.

In France, the far-right threat has diminished for now, with Emmanuel Macron emerging victorious in the French presidential elections.However, it would be remiss to forget that Marine Le Pen and her Front National party captured 21.3% of the vote in the first round. At the head-to-head stage, Le Pen secured 33.9% which equates to 10.6 million votes.

Hungary should get a mention, as they already have a far-right leader in power. Prime Minister Viktor Orban has systematically undermined judicial independence in the country over the past few years, and has also limited the freedom of the press. The rise of the far-right is not something that is likely to go away soon and the threat these parties pose to the EU as a whole could have significant repercussions in the not-too-distant future.

Italian budget: Towards the end of September, Italy’s decision to increase public spending despite being in mountains of debt risked the ire of Brussels. Italian markets suffered heavy losses as a result of the government’s decision to agree a 2019 budget deficit target at 2.4% of GDP. However, less than a week later, the markets staged a recovery as Italy backed down in its row. It appeared that all might be well. Then, the European Commission President, Jean-Claude Juncker, hinted that Brussels will reject Italy’s plans. Juncker said that there was a gap between what Rome has promised and what it presented to Brussels. The outlook does not look good at present and there could be some fireworks to come.

Eurozone economy: In September, we learned that the eurozone’s economy was slowing slightly, with GDP increasing at an annualised rate of 1.5% in the second quarter of 2018. It was the second successive quarter that trade fears have weighed heavily on economic growth and we might not yet have seen the full effects. In 2017, trade was a vital part of the eurozone’s economic recovery, so it follows that any traderelated issues were always going to have a significant impact on growth. Business confidence has been affected in Germany and across the eurozone, and it will be interesting to see what the GDP figures for the third quarter of 2018 are.

Brexit: Given that we reside in the UK, it is understandable that the headlines are dominated by the impact of Brexit on our economy. However, if there was a no-deal Brexit (which is looking increasingly likely), countries in the EU would certainly be affected too. If Britain ends up adopting WTO rules, then growth across Europe would almost certainly fall and, while the UK would be affected the most, there would be economic pain across Europe. The next few months are important for both sides of the negotiating table.

With just over five months now until the UK withdraws from the European Union, it is imperative that more is done to agree a deal in the immediate future. At the start of October, the Dow Jones reported that a Brexit divorce deal could be agreed within a week, but that proved to be wide of the mark. Investors have repeatedly jumped on any signs of a breakthrough, but when details have failed to materialise, they have sold sterling. That explains why the pound has been extremely volatile of late, with no signs of calmer waters anytime soon.

Brexit: It is clear that the UK’s withdrawal from the EU will be the chief economic factor to look out for in the next quarter and probably beyond that too. Since the UK formally triggered the Brexit process by giving notice under Article 50 of the Lisbon Treaty, the pound has suffered more than a 20-cent GBP/USD swing between the highs and lows and almost a 13-cent GBP/EUR swing. A raft of British businesses have issued hard Brexit warnings, but we’re still no closer to agreeing a deal. We should always bear in mind that any economic impacts that have come about since the UK voted to withdraw
from the EU are not the full story; we will only begin to get a real sense of the impacts when we have officially left.

UK economy: The UK economy failed to grow in August which was worse than
the paltry 0.1% growth economists had forecast. On the same day, the International Monetary Fund reported that the UK’s public finances are among the weakest in the world, with only Portugal being in a worse state. We are now firmly into the final quarter of the year, but we will have to wait until 9 November to see the preliminary estimate of the UK’s GDP growth rate for the third quarter of 2018. Last time around, the year-onyear figure was 1.2% and some are already predicting a nudge up to 1.4%. That would certainly be welcome news, but as with all things of this nature, we will have to wait and
see what the actual figure is.

Inflation: On 19 September, we learned that the UK inflation rate in August jumped to 2.7% from 2.5% the previous month. It was the highest mark for six months and analysts had actually expected a dip to 2.4%. The year-on-year rise in CPI in August meant that the gap between inflation and wage growth was narrowing which put pressure on UK households. However, we have since learned that wage growth rose by 3.1% in the three months to August – the highest pay growth in almost a decade. The day after, new inflation figures showed a drop to 2.4% in September. Not only will this ease the cost of
living burden, but it could convince the Bank of England to delay a rate hike. It will be interesting to see how inflation fares in the last three months of 2018.

The Pound is firmer this week as markets look to put a floor under the sharp declines suffered on Friday, September 21 on renewed fears the E.U. and U.K. are headed for a ‘no deal’ Brexit.

We doubt the Pound is ready to recover all its losses and achieve levels near 1.13 again and argue it will take concrete signs on the progress of Brexit negotiations to trigger any meaningful rally in the Pound.

Traders have been bruised by U.K. Prime Minister Theresa May’s warning that without concerted engagement by European Union counterparts Brexit negotiations risk failure; May’s comments came at a time markets were growing in confidence that a deal was in reach following a string of positive developments over the course of September.

May’s extraordinary intervention in the debate followed a meeting of E.U. leaders in Salzburg where leader after leader lined up to quash hopes for a deal being secured under the current framework.

“After a few weeks of relief, GBP fell sharply following the EU summit in Salzburg, and comments from PM May that dug in on the UK’s negotiating position. The summit offered no progress on the Irish border nor the end-state terms and although expectations for any decisive action were low, the tense atmosphere has shaken the improving sentiment in GBP,” says a note from the foreign exchange strategy desk at Goldman Sachs.

Near-term, we expect the Pound to continue reflecting swings in Brexit sentiment with gains seen on growing expectations for a deal, and losses to reflect deteriorating sentiment for such an outcome.

However, longer-term expectations for a recovery in the value of Sterling remain intact as the likelihood of a deal being secured by the E.U. and U.K. are high.

“Our base case remains that we get a deal with probability around 70%,” say Goldman Sachs. “The political theatre around the Chequers proposal is dominating the headlines but ultimately we believe the path to a deal is likely through keeping vague the detail of the end-state.”

News reports out on Monday suggest the U.K. Cabinet are moving towards establishing an united position around a more traditional Canada-style free trade agreement.

This move will likely secure the backing of Theresa May’s ‘Brexiteer’ colleagues in parliament who have advocated for such an outcome and have argued for May to ditch the Chequers proposal.

And, the contingent of ‘remainer’ MPs in her party are also likely to back such a deal as it avoids the worst-case scenario posed by a ‘no deal’ Brexit.

Of course, the major sticking point remains the Irish border, but the E.U. have hinted at concessions on the matter at various points in September; and as such there is good reason to believe the obstacle can be navigated and a deal ultimately reached.

In the event of a deal, Goldman Sachs say we “should see GBP around 5% stronger vs. EUR and USD.”

No Deal Could see Pound Fall 10%

While a wait-and-see approach to Brexit negotiations is perhaps the most sensible approach to Sterling over coming weeks, foreign exchange participants and businesses will continue to buy downside protection against a major decline in the event of talks ultimately failing.

The downside risks to Sterling remain substantial in the event of a ‘no deal’.

“The political environment at Westminster is fraught, and a breakdown of negotiations cannot be ruled out,” says Adrian Paul, a foreign exchange strategist with Goldman Sachs in London

“If it were to happen, our FX strategists argue that a combination of heightened uncertainty and prospective adjustment could precipitate a 10% nominal Sterling depreciation in the first six months,” adds Paul.

According to Goldman Sachs, if the UK were to leave the EU with ‘no deal’, two factors would be likely to precipitate a sharp depreciation in the Sterling exchange rate:

First, greater uncertainty would raise the risk premium embedded in Sterling assets.

Second, the UK would begin trading with the EU on the basis of WTO tariff rules.

Goldman Sachs 12 Month Forecasts for the Pound

On a 12 month horizon, Goldman Sachs forecast the Pound-to-Euro exchange rate to be at 1.11.

The Pound-to-Dollar exchange rate is forecast to be at 1.39.

Credit to: www.poundsterlinglive.com

The Pound is firmer this week as markets look to put a floor under the sharp declines suffered on Friday, September 21 on renewed fears the E.U. and U.K. are headed for a ‘no deal’ Brexit.

We doubt the Pound is ready to recover all its losses and achieve levels near 1.13 again and argue it will take concrete signs on the progress of Brexit negotiations to trigger any meaningful rally in the Pound.

Traders have been bruised by U.K. Prime Minister Theresa May’s warning that without concerted engagement by European Union counterparts Brexit negotiations risk failure; May’s comments came at a time markets were growing in confidence that a deal was in reach following a string of positive developments over the course of September.

May’s extraordinary intervention in the debate followed a meeting of E.U. leaders in Salzburg where leader after leader lined up to quash hopes for a deal being secured under the current framework.

“After a few weeks of relief, GBP fell sharply following the EU summit in Salzburg, and comments from PM May that dug in on the UK’s negotiating position. The summit offered no progress on the Irish border nor the end-state terms and although expectations for any decisive action were low, the tense atmosphere has shaken the improving sentiment in GBP,” says a note from the foreign exchange strategy desk at Goldman Sachs.

Near-term, we expect the Pound to continue reflecting swings in Brexit sentiment with gains seen on growing expectations for a deal, and losses to reflect deteriorating sentiment for such an outcome.

However, longer-term expectations for a recovery in the value of Sterling remain intact as the likelihood of a deal being secured by the E.U. and U.K. are high.

“Our base case remains that we get a deal with probability around 70%,” say Goldman Sachs. “The political theatre around the Chequers proposal is dominating the headlines but ultimately we believe the path to a deal is likely through keeping vague the detail of the end-state.”

News reports out on Monday suggest the U.K. Cabinet are moving towards establishing an united position around a more traditional Canada-style free trade agreement.

This move will likely secure the backing of Theresa May’s ‘Brexiteer’ colleagues in parliament who have advocated for such an outcome and have argued for May to ditch the Chequers proposal.

And, the contingent of ‘remainer’ MPs in her party are also likely to back such a deal as it avoids the worst-case scenario posed by a ‘no deal’ Brexit.

Of course, the major sticking point remains the Irish border, but the E.U. have hinted at concessions on the matter at various points in September; and as such there is good reason to believe the obstacle can be navigated and a deal ultimately reached.

In the event of a deal, Goldman Sachs say we “should see GBP around 5% stronger vs. EUR and USD.”

No Deal Could see Pound Fall 10%

While a wait-and-see approach to Brexit negotiations is perhaps the most sensible approach to Sterling over coming weeks, foreign exchange participants and businesses will continue to buy downside protection against a major decline in the event of talks ultimately failing.

The downside risks to Sterling remain substantial in the event of a ‘no deal’.

“The political environment at Westminster is fraught, and a breakdown of negotiations cannot be ruled out,” says Adrian Paul, a foreign exchange strategist with Goldman Sachs in London

“If it were to happen, our FX strategists argue that a combination of heightened uncertainty and prospective adjustment could precipitate a 10% nominal Sterling depreciation in the first six months,” adds Paul.

According to Goldman Sachs, if the UK were to leave the EU with ‘no deal’, two factors would be likely to precipitate a sharp depreciation in the Sterling exchange rate:

First, greater uncertainty would raise the risk premium embedded in Sterling assets.

Second, the UK would begin trading with the EU on the basis of WTO tariff rules.

Goldman Sachs 12 Month Forecasts for the Pound

On a 12 month horizon, Goldman Sachs forecast the Pound-to-Euro exchange rate to be at 1.11.

The Pound-to-Dollar exchange rate is forecast to be at 1.39.

credit to : www.poundsterlinglive.com

The pound reversed its early losses against the dollar and the euro on Wednesday, jumping sharply after the UK and German governments appeared to soften their respective demands for a Brexit deal.

Earlier, sterling had fallen as much as 0.4 per cent against both the dollar and the euro after new data revealed business optimism has fallen to a five-month low, largely due to concerns over the UK’s EU departure.

The pound shot up to $1.30 against the dollar from an earlier low of $1.28 and briefly spiked to €1.12 before settling back to €1.11.

The big movements in the currency markets came on the back of reports that both the UK and Germany are willing to accept a less detailed agreement on trade in a bid to get a deal completed by March and avoid a cliff-edge Brexit.

in less positive news for sterling, the Purchasing Managers Index for UK services in August came in better than expected at 54.3 in the month, up from 53.5 in July (any figure above 50 signals expansion).

However, the reading for business confidence declined to one of its lowest levels since the 2016 EU referendum, with the Chartered Institute of Procurement & Supply, which sponsors the PMI survey, noting anecdotal evidence that Brexit uncertainty continued to hold back business-to-business spending, especially in relation to large-scale projects.

“Though the sector remained in positive territory, the dark clouds of political indecision are still having an effect and preventing more business activity.

“Service providers are likely to continue along this vein for the rest of the year until those clouds have cleared,” said Duncan Brock of the CIPS.

Chris Williamson, chief business economist at IHS Markit, said the findings pointed to further gloom in the future.

“Given the increasingly unbalanced nature of growth and the darkening business mood, risks to the immediate outlook seem tilted to the downside,” he said.

Meanwhile, Fiona Cincotta, a senior market analyst at City Index, said: “Normally the weaker pound would have helped some major FTSE companies gain ground but instead the FTSE index weakened amid a general worsening of the market mood with trade concerns and Brexit worries lingering in the background.”

The FTSE 100 was down 0.42 per cent in early afternoon trading.

THE pound euro exchange rate has managed to find firmer ground ahead of the long bank holiday weekend after dropping half a cent yesterday in reaction to the government’s no-deal Brexit papers. So far today the pound euro exchange rate has been lingering around the day’s opening levels of €1.109.

Yesterday’s “worst-case scenario Brexit” plans were released to inform consumers and businesses about how to prepare for a no-deal split.

Despite UK Brexit Secretary Dominic Raab stating in an accompanying speech that the papers would be “rendered redundant” if the UK and EU came to an agreement, Sterling still saw a sharp decline.

Scotland’s First Minister Nicola Sturgeon stated in a heated tweet that a “no deal Brexit would be an unmitigated disaster – and the fact that UK [government] is even talking about it is evidence of their abject failure”.

Nevertheless, politicians seem hopeful that a deal is likely, with negotiations currently ongoing.

Economists were anticipating a chance of the pound making some headway this morning courtesy of the UK’s mortgage approvals numbers for July, but the figure fell short of expectations at just 39.584k, despite a forecast of 42.5k.

While this hasn’t noticeably impaired GBP this session, it’s likely that any impact this data would have had has been overshadowed by intensifying Brexit jitters.

On the other side of the pairing, the euro made progress yesterday thanks to the latest Eurozone PMI’s, which forecast growth in the bloc to have remained steady in August.

However, this was tempered by a less optimistic outlook for future growth due to this month boasting one of the lowest rates of expansion seen in the bloc of late.

It came as company optimism fell to its lowest rate in almost two years due to current geopolitical and economic instability.

This, along with this morning’s lacklustre German GDP figure for the second quarter, has seen the pound euro exchange rate trade within a narrow range so far this session.

Looking ahead, both currencies may struggle today, with the session marked by a noticeable absence of UK and Eurozone data, which could see the pairing fluctuate as investors eye Brexit developments and the ongoing trade spat for signs of instability.

GBP/EUR Exchange Rate Steady’s on Robust UK Retail Sales

The Pound Sterling to Euro (GBP/EUR) exchange rate is trending in a narrow range this morning, following the release of the UK’s latest retail sales figures.

At the time of writing the GBP/EUR exchange rate is virtually unchanged from its opening levels today, after briefly fallen 0.2% earlier in the session.

Pound Sterling (GBP) Stable as UK Retail Sales Jump

The Pound (GBP) is holding its ground against the Euro (EUR) this morning following the release of the some positive UK retail data.

According to data published by the Office for National Statistics (ONS), UK retail sales climbed by 0.7% last month after contracting 0.5% in June helping to buoy Sterling sentiment this morning.

This outpaced forecasts of a more modest rebound to 0.2% but was still way behind the 1.4% rise in sales growth seen in May.

The ONS reported that the recent heatwave continued to impact sales last month, with footfall in high street stores remaining weak as people looked to enjoy the sunshine.

Sales growth last month was instead dependant on online sales, with online spending reaching a record high in July thanks to a number of discounts being offered by online retailers, while strong demand for food and drink also helped contribute to the uptick in sales.

Rhian Murphy, Senior Statistician at the ONS said:

‘Many consumers stayed away from some high street stores in July, but online sales were very strong, supported by several retailers launching promotions.

‘Food sales remained robust as people continued to enjoy the World Cup and the sunshine.’

Euro (EUR) Exchange Rates Firm as Turkey Fears Cool

The Euro (EUR) meanwhile, began trending higher against the Pound (GBP) and many of its other peers this morning thanks to the Turkish Lira’s (TRY) modest recovery over the past couple of days.

After striking record lows on Monday, the Lira has begun to creep back up, helped in part thanks to measures by Turkey’s central bank to squeeze Lira liquidity.

This in turn has aided in reducing fears that Turkey’s financial woes could spill over into the Eurozone and lent support to the Euro this morning.

However the real test for the Lira is yet to come as, Turkey’s recently appointed finance minister, Berat Albayrak will need to convince international investors in a conference call later this afternoon that Ankara is prepared to make difficult decisions in order to quell inflation.

GBP/EUR Exchange Rate Forecast: Euro to Remain Flat Despite Rising Inflation?

Looking ahead to Friday’s session, the Pound Euro (GBP/EUR) exchange rate looks to close the week in a narrow range despite an expected rise in Eurozone inflation.

Economists forecast that Friday’s Consumer Price Index (CPI) will confirm that Eurozone inflation ticked up from 2% to 2.1% in July.

However with the European Central Bank (ECB) pledging to leave interest rates on hold until at least the end of summer next year, there is little upside to the rise in inflation in the eyes of EUR investors.

Meanwhile, barring any major Brexit developments the Pound may also struggle to make any headway tomorrow as an absence of UK data provide little catalyst for movement.

Monetary policy committee lifts cost of borrowing to highest level since 2009.

The Bank of England has raised interest rates above the emergency level introduced straight after the financial crisis, despite mounting fears about the economic impact of Britain crashing out of the EU without a deal.

Signalling the gradual return of higher borrowing costs, Threadneedle Street raised interest rates to 0.75% from 0.5% – the level they were dropped to in March 2009 as the economy lurched through the last recession.

The Bank’s nine-member monetary policy committee voted unanimously for the increase, judging the economy had bounced back from a soft patch earlier this year triggered by the freezing weather and heavy snowfall from the “beast from the east”.

While warning Brexit could blow the economy off course, the MPC said recent readings for economic growth “appear to confirm that the dip in output in the first quarter was temporary, with momentum recovering in the second quarter”.

The rate setters added that if the economy continues to recover as forecast, an “ongoing tightening of monetary policy” – meaning more interest rate rises – would be required to return inflation towards the Bank’s 2% target over the next few years.

Having made the call to move interest rates for only the third time in the past decade, the Bank’s latest decision comes amid growing fears over Brexit, with Theresa May facing parliamentary divisions over her plan.

Raising interest rates will mean higher borrowing costs on mortgages and loans for hard-pressed consumers and businesses as they adapt to Britain leaving the EU.

An extra 0.25% interest will add £12 a month to a £100,000 repayment mortgage and £25 on a £200,000 loan. However, nearly 70% of homebuyers have fixed-rate mortgages, so will be unaffected.

Some economists had urged the Bank to keep rates on hold to help support jobs and growth amid the uncertainty.

Mark Carney, the Bank’s governor, had previously said it could use an emergency rate cut in the event of no deal. While Threadneedle Street has a mandate to steer inflation towards 2%, it can deviate to support the economy through difficult periods.

However, factory output has slowed amid softer global economic growth, as Donald Trump has slapped import tariffs on some of the US’s biggest trading partners, including the EU and China. Despite the low levels of unemployment in the UK, pay rises for British workers also remain elusive.

But in giving its verdict for higher rates, the MPC said it believed wages should begin to rise over the next three years, helped by the low levels of unemployment, while economic growth should average around 1.75% per year.

Factors to Watch in Europe

The eurozone’s economy hasn’t performed quite as well as expected in 2018, with many stating that the economic forecasts made at the turn of the year were a little too optimistic. However, the situation has been exacerbated by the ongoing trade dispute with the Trump administration and in recent weeks has become even worse, with Trump threatening to impose tariffs on
European car imports. While those tariffs are yet to materialise, the eurozone’s economy is already taking a hit.

What to look out for:

Trade war:

When the European Union cut its eurozone growth forecasts, it was the clearest sign that the ongoing trade disputes with the Trump administration were having a significant impact on the European economy. At the time of writing, there are only tariffs on steel and aluminium imports, but Trump’s threat to impose tariffs on European car imports has rattled the European Commission. Business confidence has already been affected, but if Trump moves ahead with his plans, the global economic recovery could be disrupted.

Political and policy uncertainty:

At the start of June, Giuseppe Conte was sworn in as the prime minister of the new Italian populist government. While Conte assumes the role of the most powerful office in Italy, it is the leaders of the right-wing League party and the anti-establishment Five Star Movement who will likely call the shots. It is of some concern that the new government is eurosceptic and has promised a spending and tax-cutting binge. We could be heading towards a new European crisis which would rattle investors and the eurozone as a whole.

Monetary policy normalisation:

On 14 June 2018, the European Central Bank stunned the markets by announcing it would halve the pace of its quantitative easing programme to just €15 billion per month after September. More surprising still, was the decision to stop buying any new bonds from December. Ultimately, this means that the ECB has decided there is no longer a need for an ultra-loose monetary policy. However, Mario Draghi has insisted that interest rates will not be increased until at least the middle of next year. It is possible that Draghi could leave his position as president of the ECB without ever having increased interest rates.

Brexit:

Brexit has already had a negative impact on the UK economy, despite the fact that Britain will not be leaving the EU for another eight months. The uncertainty surrounding the government’s plans and what the EU will make of them has led to some significant swings in the value of the pound. British business leaders are understandably worried about the lack of certainty, with Jaguar Land Rover warning that its £80 billion UK investment plan is at risk if the UK leaves the EU single market.
Theresa May recently managed to defeat a Commons rebellion and her position has been bolstered as a result. It will be hoped that the UK and EU reach an agreement sooner rather than later.

The UK economy:

The economy received a boost when UK growth for the first quarter of 2018 was revised up. The Office for National Statistics had estimated that the UK
economy grew by 0.1% in the first three months of the year, but the final reading was 0.2%. In July, ONS issued its first ever monthly GDP reading, which showed that UK GDP increased by 0.3% in May. While this is welcome news, it served to highlight how imbalanced the UK economy currently is. For, while the services sector posted impressive figures, construction and manufacturing both shrank. It will be interesting to see what the next few monthly readings show.

Interest rates:

When the first monthly UK GDP reading was released, it fuelled speculation that the Bank of England will increase interest rates in August. However,
since then wage growth has slipped to its weakest level in six months. That alone was unlikely to dampen expectations of an August rate hike, but when inflation held steady at 2.4% in June, the chances greatly diminished. The pound tumbled to its lowest mark against the dollar since September 2017 and it makes for a fascinating run up to the rate decision announcement

Credit: Smart Currency Business July-September Forecast 2018