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It's so funny, how we don’t talk anymore

Published: Wednesday 06 February 2019

  • ​​Italy's economy causing fresh headaches
  • European economic January blues
  • Back to the backstop
Even with the drama of Brexit, the Pound picked up against the Euro in January 2019 over optimism that the UK and EU could reach a deal. Typical Interbank rates ranged from a low of 1.104 on 11th January on poor manufacturing and trade deficit data – as well as worries over the outcome of the Plan B Brexit vote the following week – to a high of 1.160 on 26th January, when it looked more likely that Theresa May’s Brexit deal would be approved by MPs. In early February, the rate had settled somewhere between the two, at 1.135. Although both Sterling and the Euro have wobbled on poor economic and trading news; the major changes during February are likely to be caused by Brexit and whether the EU and UK are willing to talk and settle their differences. 

Just as the European Union breathed a sigh of relief that the Italian budget dispute had been agreed, it has been faced with fresh problems from the battered economy. New figures reveal that Italy’s economy is now in recession, having fallen 0.2% in quarter four, 2018 and 0.1% three months earlier. The last time Italy was in recession was four years ago. This impacted on the Eurozone economy, which saw growth of just 0.2% from October-December 2018, provisional data from the Eurostat statistics office showed. The previous quarter also saw the economy grow by the same amount. During 2018, Europe’s economy rose 1.8%, the slowest for four years and 0.6% less than 2017.
Italy’s populist government wanted to spend its way out of trouble, but with debt already at more than 130% of GDP, the European Commission pared back its big spending budget plans. In addition, January estimates from the Bank of Italy suggest the trend in economic activity dropped to a five-year low and business activity fell back, causing job losses for the first time in seven months, according to the latest IHS Markit Purchasing Managers’ Index (PMI). Unsurprisingly, business sentiment was at a five-month low, with just 35% of service providers confident of a rise in business activity over the next year.
European economic January blues

Meanwhile, there was a fall in German growth in the third quarter of 2018 by 0.2% as Brexit worries also weighed on the Eurozone economy. It was the first time since 2015 that the German economy had fallen back. The decline was due to weaker exports affected by international trade disputes. Overall, the German economy grew 1.1% year-on-year. There was more concern as a 4.3% monthly drop in retail sales in Germany in December 2018 contributed to a 1.6% fall across Europe, the worst result for seven years. Economic sentiment also hit the lowest level for two years. Meanwhile, the IHS Markit Composite Purchasing Managers’ Index (PMI) for the Eurozone fell for the fifth month running to 51, its lowest for five and a half years, and signalling low business growth.
We have already highlighted weak activity in Italy, but there was also bad news for France. Output in France was down for a second successive month, and at the fastest rate in over four years. Manufacturing was the primary source of output weakness. Whilst service sector growth was unchanged since December at around a four-year low, production in manufacturing rose only slightly and at the weakest rate in over five and-a-half years. There was some good news, as business confidence reached a three-month high - although it was still subdued, according to the IHS Markit figures. Its Chief Business Economist, Chris Williamson, says, “The Eurozone has started 2019 on a flat note, with growth close to stagnation amid falling demand for goods and services.” Brexit and the gilet jaunes (yellow vests) protests are affecting sales and business confidence, he explains.
“Employment growth is now also being affected by a growing reticence to expand capacity, with jobs being created at the slowest rate for over two years.” The deteriorating picture looks broad-based. Italy is in its steepest downturn for over five years and France has sunk into its sharpest decline for over four years. Faster growth in Germany and Spain meanwhile looks tenuous, as order book trends deteriorated in both cases. “The survey indicates that political uncertainty, both global and local, is increasingly taking a toll on growth, dampening demand and driving increased risk aversion. Add in rising global trade tensions, Brexit uncertainty, the ‘yellow vest’ protests in France and a spluttering auto sector, it’s clear that the business environment is at its most challenging since the height of the region’s debt crisis.”

Euro coins in a tower - Halo Financial

Back to the backstop

UK Prime Minister Theresa May is still hoping to engage Europe in talks over Brexit in early February, but it remains to be seen whether European Commission President Jean-Claude Juncker will negotiate over changes to the Irish backstop. Leader of Ireland’s Democratic Unionist Party, Arlene Foster, has warned that European Union “intransigence” in refusing to talk could cause a no-deal Brexit. Mrs May is working on proposals to either removing the need for the backstop or providing a firm time limit. The EU has said previously that the backstop has been previously agreed and is not open to negotiation.

Foreign Secretary, Jeremy Hunt, has suggested that if no progress is possible at the moment, the Brexit deadline could be extended to give the UK more time to reach agreement with the European Union. He told the Today news programme, “I think it is true that if we ended up approving a deal in the days before the 29th March, then we might need some extra time to pass critical legislation. But if we are able to make progress sooner then, that might not be necessary.”

The comments come after the vote on a series of Brexit amendments by MPs, who made it clear that they want a deal agreed before leaving the European Union and “alternative arrangements” to the Irish backstop. However, they pulled back from making a binding agreement to delay Brexit, as the vote in late January was only advisory. Following the votes on a series of Brexit amendments, European Union leaders have stood firm, saying that no renegotiation over the backstop will be possible.

UK businesses are concerned that the ongoing uncertainty and delays, with reports that almost one in three businesses have moved operations from the UK or are thinking of doing so, according to an Institute of Directors (IoD) survey. It reports that 29% of firms among 1,200 members believed Brexit posed a significant risk to their operations in the UK and had either moved part of their businesses abroad already or are planning to do so. The IoD’s interim director general, Edwin Morgan, says, “We can no more ignore the real consequences of delay and confusion than business leaders can ignore the hard choices that they face in protecting their companies. Change is a necessary and often positive part of doing business, but the unavoidable disruption and increased trade barriers that no deal would bring are entirely unproductive.”

Carolyn Fairbairn, Director General of the Confederation of British Industry called the House of Commons votes another deeply frustrating day for British business. “The never-ending parliamentary process limps on while the economic impact of no deal planning accelerates. The Brady amendment feels like a throw-of-the-dice. It won’t be worth the paper it is written on if it cannot be negotiated with the EU. Any renegotiation must happen quickly - succeed or fail fast.”

Adam Marshall, Director General of the British Chambers of Commerce, agreed, saying, “Government and parliament are still going round in circles when businesses and the public urgently need answers.” These may come over the next month. If no Valentine’s present of a new deal is appears by Thursday 14th February, MPs will get instead as a gift a further Meaningful Vote, says UK Prime Minister, Theresa May. If no deal is reached then, there will be another vote on Thursday 14th March. However, even though MPs say they want a deal, if none can be reached, the default position is still leaving the European Union on 29th March - without a deal.

What next for GBPEUR?

The Sterling-US Dollar relationship has been dragging Sterling down versus the Euro, after last week’s failure to trade through and hold above the 1.1600 area of resistance mentioned in previous updates.

Guidance for buying Euros

If you are looking to buy Euros, look to rallies towards 1.1470 to convert a portion of your funds with potential for further gains to retest that 1.1600 level, where you can convert another portion.

Guidance for selling Euros

Initial support arrives at the 200-day moving average currently around the 1.1277 level so look to convert a portion here. On a break below that level, look for further losses towards 1.1220 and 1.1190.

GBP EURO Feb 2019
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