Thursday, 15 December 2016

FED raise rates, BoE could weaken Pound today

Last night the US Federal Reserve raised interest rates by 0.25%, pushing them up to 0.75%. This was widely expected so isn't much of a surprise. What did surprise the  markets was the fact they also indicated that they would continue to raise rates next year possibly 3 times. This caused the USD to strengthen, pushing GBP/USD rates lower:


As the Dollar gained strength, the Euro weakened, briefly pushing GBP/EUR rates to nearly €1.20, however the gains were short lived as Brexit came back in to focus amid reports it may take 10 years to agree a trade deal with the EU. This weakened the Pound bring rates back to the €1.19 level where they have sat for some time.

Bank of England announcement today


Today at 12pm the BoE will announce their decision on interest rates. They will be left on hold at 0.25%, but at 12:45pm the governor Mark Carney will give a press conference. Usually when he speaks he's rather negative about the UK economy and the effects of 'Brexit' so there is a good chance the Pound will fall this afternoon depending on his comments.


10 years for an EU trade deal? 


Perhaps, but I think the EU attitude as they enter negotiations will be one of protectionism. The EU sells more to us then we sell to them, so if a deal is not made within the 2 years and tariffs are added, then the EU would be paying us Billions in order to continue selling their goods to the UK, so it's not really in their interest. However when you consider that any deal will need to be ratified by all 27 member states, I expect things to drag out for some time, despite the fact that it's clearly in both the UK's and EU's interest to make an agreement as soon as possible.

Still, a 5 to 10 year period to agree barrier free trade is a worst case scenario and it's reasonable to set this out. As MP Dominic Raab said on Radio 4 this morning, the key thing is where we maintain barrier free trade in the meantime while a deal is made, in which case there is no problem. That's clearly in our interests, and that of the EU. However, until article 50 is triggered, uncertainty remains, and that uncertainty is likely to keep Sterling from making gains against the Euro.

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