Fundamental Analysis

Pound Climbs as Britain Sweetens Brexit Pot


The British pound has posted considerable gains in the Wednesday session. In North American trade, GBP/USD is trading at 1.3443, up 0.77% on the day. On the release front, British Net Lending to Individuals dropped to GBP 4.8 billion, above the forecast of GBP 4.3 billion. Bank of England Governor Mark Carney spoke at an event in London. In the US, Preliminary GDP for the third quarter came in at 3.3%, matching the forecast. Pending Home Sales jumped to 3.5%, crushing the estimate of 1.1%. As well, Fed Chair Janet Yellen testifies before a congressional committee. On Thursday, the US releases Personal Spending and unemployment claims.

British Prime Minister Theresa May has blinked first, going a long way to meeting the European demands on Britain's bill for leaving the European Union. The Europeans had demanded EUR 60 billion, while the UK had countered with EUR 20 billion. However, the UK has upped its offer significantly, and the final amount could be as high as EUR 50-60 billion. The British government is anxious to start talks on a trade deal with the EU, and this offer should placate Brussels and pave the way for trade talks to begin in December. Another thorny issue is the border between Northern Ireland and Ireland. Britain has ruled out having the north remain in a customs union with the EU after Brexit, but Ireland is insisting that there not be a hard border.

There was positive news from the banking sector on Tuesday, as all seven major UK banks passed the BoE's stress tests. This is a reliable indication that the banking sector is in decent shape, despite nagging concerns about the toll that Brexit could take the British economy. Still, investors were quick to seize on negative comments from BoE Governor Mark Carney, who warned that in the case of a "disorderly" Brexit, the financial sector would face "some quite material economic costs". Carney's warning briefly sent the pound lower, but it managed to recover.

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