A report in The Times claiming that EU leaders were preparing to offer a two-year Brexit transition deal led to a sharp rise in the pound yesterday. The report further claimed that negotiators were close to avoiding a 'hard border' between the UK and Ireland. Assuming an Irish border arrangement will be concluded shortly, a deal may be offered as as January. Many financial services organizations based in London have asked for a transition deal in order to make arrangements to continue serving EU clients following Brexit. Currently, British financial institutions serve EU customers by 'passporting' their UK license to other countries in the region. As more and more media reports suggest that progress is being made with regards to a Brexit deal, the pound is rallying as a result. Our short-term and medium-term outlook remain bullish.
GBP/USD is currently just above 1.3530. EUR/GBP is flat today and the pair is currently trading above 0.880. The pound is flat against both the Australian dollar and the Canadian dollar. GBP/AUD is above 1.7890, while GBP/CAD is just above 1.7410.
This is a fairly light week for economic data relating to the pound. Earlier today, the BoE's Financial Stability Report suggested that British banks were ready in the event of 'hard Brexit'. However, RBS and Barclays are likely to be the weakest in the event of significant volatility. BoE consumer credit was lower than expectations (1.45b vs. 1.5b expected) as were mortgage loans (3.39b vs. 3.6b expected). GfK consumer confidence (-12 vs. -11 expected) and Nationwide house prices (2.5% vs. 2.7% expected) both missed expectations. Later today, we'll see Markit manufacturing PMI. Last week, the Autumn Forecast Statement suggested a weak outlook for future economic growth.
As the pound rises following Theresa May's calls for an election, we are now bullish on the currency in the medium-term. The pound is now trading within normal conditions. This is based on a range of technical indicators looking at a weekly chart.