Sterling steadied on Friday as fears over a disorderly Brexit returned to the fore, as risks mount that the UK will renege on its withdrawal agreement with Brussels.
The UK currency added 0.3 per cent against the dollar at $1.2842 (€1.12) in early Friday trading. The pound has tumbled more than 3 per cent this week as Boris Johnson’s government revealed its plans to override the Brexit treaty by the end of the month. Sterling was up 0.1 per cent against the euro at about €1.08. One euro buys 92.21p.
"Volatility in GBP crosses is to be expected in the coming weeks," said Gaétan Peroux, strategist at UBS Global Wealth Management. But he added that "we continue to believe that cooler heads will prevail in the end".
Boon
The pound’s sell-off has proven to be a boon for FTSE 100 companies, whose exports benefit from a weaker currency. Many are multinational groups that book revenue in foreign currency and report earnings in sterling. Despite the pound rising slightly, the UK’s blue-chip index rose 0.3 per cent in early trading on Friday.
The UK economy expanded for the third consecutive month in July, fuelled by coronavirus-related restrictions being eased in the services sector but output remained well below the pre-pandemic level, figures on Friday showed.
The road to recovery will be long, though, as the economy has only made up half of the gross domestic product it lost since the start of its coronavirus-related lockdown.
The euro strengthened on Friday, adding 0.2 per cent to $1.1843, after the European Central Bank did not indicate that it would push back forcefully against a stronger common currency in its monetary policy meeting on Thursday.
However, the ECB’s chief economist warned in a blog on Friday that there was “no room for complacency” on the region’s economic rebound and expressed concern at how the stronger euro was holding back inflation.
"It should be abundantly clear that there is no room for complacency," Philip Lane said, dialling down the more upbeat tone struck a day earlier by ECB president Christine Lagarde, who analysts said had seemed optimistic.
“Inflation remains far below the aim and there has been only partial progress in combating the negative impact of the pandemic on projected inflation dynamics,” said Mr Lane. “The recent appreciation of the euro exchange rate dampens the inflation outlook.”
Stocks across Europe gradually accelerated their gains in early trading. The benchmark Stoxx 600, which was insulated from the heavy selling of mega-cap US tech stocks at the start of the week, added 0.4 per cent on Friday.
Meanwhile, shares across Asia-Pacific shook off growth concerns to push higher. China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks rose 1 per cent while Hong Kong’s Hang Seng and Tokyo’s Topix both gained about 0.7 per cent.
Gains
Shaky trading early in the session came after a rough day on Wall Street, where shares fell for the fourth session out of five. Earlier gains were reversed after a relief package to cushion coronavirus-induced damage was voted down in the US Senate.
“Investors are feeling underwhelmed on what is coming on the other side,” said Todd Jablonski, chief investment officer at Principal Global Asset Allocation.
He added that investor fatigue was taking hold with relation to additional monetary policy and uncertainty over the US election, together with an exhaustion of upside surprises for earnings.
“Each additional [monetary policy] announcement is having a diminishing marginal return,” he said. “You are seeing investors price in a more rational rate of growth in more keeping with historical levels.”
Futures tipped US shares to edge higher when trading begins in New York, with the S&P 500 set to climb 0.8 per cent and the Nasdaq 100 set to rise 1.3 per cent.
Oil prices hovered around the $40-a-barrel mark. Brent crude, the international benchmark, was down 0.2 per cent to $39.98 a barrel. – Copyright The Financial Times Limited 2020
