Whilst the pound has had a mini-slump over the last few days, 2020 might not be so bad for the currency. Murmurs amongst the Bank of England’s Monetary Policy Committee hint at a potential interest rate reduction. However, private spending is tentatively showing signs of picking up- possibly an indication of the economy turning a corner. Also, we now have a short-term solution to Brexit, as the UK prepares to leave the EU on 31st January and enter into a transition period, where conditions for business will stay relatively similar to now.
Markets wait for March Budget
Brexit will undoubtedly continue to have an impact on sterling, but analysts are warning that the effect of UK and EU trade negotiations won’t take place until later in the year. Boris Johnson has made it clear that the UK will leave the EU completely at the end of 2020, with or without a trade deal.
However, during a meeting between Johnson and European Commissioner Ursula von der Leyden, the idea of having a semi-completed trade deal was discussed, meaning that the UK could leave the EU with bits of the deal agreed, with others still pending.
It will probably be during the summer when trade deal progression hits sterling. Before that, there are other events which could move the pound. This government’s first budget announcement is due in March. This will outline spending intentions for the future, as well as any changes to the likes of taxation and infrastructure investment. We know that the government will be raising capital spending from 2% to 3% of GDP, and Chancellor of the Exchequer Sajid Javid has said that “there will be an infrastructure revolution”.
Business Confidence Cautiously on the Up
Now that the UK’s politically uncertain times are over, at least temporarily given Johnson’s majority, analysts are hinting that private investment could pick up. This would be timely with the Government’s increase in capital spending. Last week, we saw indications of this, as the Services PMI data for December highlighted an increase in business confidence following December’s General Election outcome.
This is all cautiously good news for the UK pound. An increase in government spending will be welcomed by sterling and grab the attention of the markets. But, if UK/EU trade talks are rocky as we enter the second part of the year, this could undo any gains made following the budget.
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