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Pound Edges Higher Vs Euro and Dollar at London Close: Tax Cuts, Economic Data and Brexit in Focus during Pre-holiday Trade

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There is scope for Pound-to-Euro to edge higher over the remainder of this week now EURUSD has topped out. Tax cuts, Brexit, UK economic data in focus.

The Pound had eked out a fractional gian over the Dollar and Euro by the London close Thursday but spent much of the session on the back foot as the greenback caught a belated bid from the market.

With tax reforms having passed through Congress Wednesday, and the market now seemingly over its earlier bout of profit-taking, the greenback advanced briefly against its rivals in the noon session only to stall just ahead of the close.

This had seen both the Pound-to-Dollar and Euro-to-Dollar rates forced into retreat, although the decline in the latter was marginally steeper than that seen by Sterling, which helped keep the Pound-to-Euro rate broadly stable.

There may be some scope for Pound-to-Euro to push higher over the remainder of the week given the EUR/USD rate now appears to have topped out close to a key resistance level at 1.1880 - after several days of gains.

“Initial resistance lies at 1.1880 the 12th October high, which has so far held on a closing basis, and while capped here, a negative bias will remain. We also note hefty resistance, which extends from 1.1880 to the 1.1976/78.6% retracement,” says Karen Jones, a technical strategist at Commerzbank.

Markets can set Pound-to-Euro prices independently of other rates but, as a foreign exchange cross-rate, GBP/EUR is at heart the product of a simple equation that divides GBP/USD over the EUR/USD price.

These are the underlying mechanics of the market and so, when the prices set by independent order books deviate away from the output of the above equation, any discrepancy is quickly arbitraged away.

The Pound was quoted 0.03% higher at 1.3372 against the Dollar by the close while the Pound-to-Euro rate was marked 0.06% higher at 1.1266. The Euro-to-Dollar rate was quoted 0.05% lower at 1.1870.

Above: Pound-to-Euro rate shown at hourly intervals.

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Consumer Outlook Clouds into Year-end

The discussion around retailers and the economy is noisy and the outlook clouded going into year end, with conflicting signals coming from various indicators of consumer spending in recent weeks.

Thursday morning saw the GfK measure of consumer confidence sink one point to a fresh four-year low of -13 for December.

“It has been a slipping and sliding year. The Overall Index Score has slipped from - 7 in January to -13 in December – and not a single positive score in between,” says Joe Staton, head of market dynamics at GfK.

In fairness, the GfK consumer confidence measure hasn’t posted a positive score for more than two years despite the economy having enjoyed its strongest post-crisis expansion in 2015, while also holding up well throughout 2016.

An overwhelming majority of that growth was powered by consumer spending, which has held up reasonably well of late, according to official measures of output. It is what happens next that has some observers concerned.

Office for National Statistics data showed consumer spending rising by 1.1% in November, when compared with the month before, while annual growth was close to 2%.

These numbers were far ahead of the consensus for more muted month-on-month growth of 0.4%, and largely the result of Black Friday promotions.

However, economists are now suggesting consumer spending might moderate a touch during December, which is an idea that was supported Wednesday by the latest Confederation of British Industry Distributive Trades survey.

“Retail sales volumes saw a second month of growth in the year to December, but this disappointed expectations of stronger growth. Sales are expected to rise at a similar pace in the year to January,” the CBI wrote in its report Wednesday.

The Distributive Trades survey polls 109 firms, 56 of which are retailers, who account for more than a third of all employment in the retail sector. It asks firms to state whether sales have risen or fallen and how actual results have compared with expectations.

“37% of retailers said that sales volumes were up in December on a year ago, whilst 17% said they were down, giving a balance of +20%. Growth was slower than expected (+30%), and slightly slower than in November (+26%),” the CBI said Wednesday.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.

May Delays while Barnier Puts End Date on Transition and Softens on Trade

European Commission negotiator Michel Barnier laid out the Commission’s draft guidelines for the next phase of Brexit negotiations Wednesday, building on those issued by the European Council Friday.

Much of the draft statement was a reiteration of the details given by the Council Friday but Barnier did say that any “transition” period would need to come to and end on December 31 2020, at the same time as the current European Union budget comes to an end.

The statements also cast fresh light over the scope for deadlock in talks to emerge once into the New Year, with Brussels insisting that the future relationship can only be agreed in outline before the UK enters transition, with the bulk of a final deal to be struck after March 2019.

The withdrawal agreement, entitling the EU to substantial payments and bestowing various other obligations on the UK, must be legislated for ahead of the UK’s departure. Bariner also threw down another hurdle to the UK government.

“Legally speaking, mechanically, the day after the U.K. has left the EU institutions, the U.K. will no longer be covered by our international agreements,” he said at a press conference. “They will be leaving approximately 750 agreements, which we have signed.”

If proven to be correct then this, combined with third country status in transition, could become a stumbling block for the government if it folds on its earlier demand the UK be able to strike trade deals while in “transition”.

Any constraint on being able to enter into deals before the transition ends could mean the UK is unable to renew and therefore, temporarily excluded from, the existing trade agreements the EU has with other countries.

That said, the documents released Wednesday bore signs of a possible softening in Brussels stance on this point.

“Where it is in the interest of the Union, the Union may consider whether and how arrangements can be agreed that would maintain the effects of the agreements as regards the United Kingdom during the transition period,” the draft documents say.

Separately on Wednesday, the UK government folded to opposition MPs and rebels within the Conservatives’ own ranks when it agreed another amendment to the European Union Withdrawal Bill.

This latest amendment allows UK lawmakers to defer the date at which the UK leaves the European Union, scuppering the government’s attempt to place a firm departure date into law.

It follows another amendment that gave parliament the power to reject the final Brexit deal negotiated by PM May and her ministers, effectively delaying the UK’s departure while another attempt at negotiation is made.

“Recent developments in the Brexit negotiations continue to support our view that the UK is ultimately headed for a softer Brexit. This is likely to provide ever more support to our constructive view on sterling which we have expressed through higher GBP/CHF,” says Kamal Sharma, a strategist at Bank of America Merrill Lynch.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.

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