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GBP CHF Recovers Ground as Markets Reassess Brexit Worries

October 13, 2017 - Written by David Woodsmith

Brexit developments prompted significant volatility for the Pound Swiss Franc exchange rate ahead of the weekend, as markets reacted to the closing statements of the latest round of negotiations.

Investors were not impressed by the more cautious tone adopted by chief EU negotiator Michel Barnier, who noted that the two sides are now at a ‘deadlock’ on the subject of any divorce bill.

With the second phase of talks now likely to be delayed due to the persistent lack of progress on key issues the odds of the UK successfully negotiating a transition period appeared to diminish.

However, Sterling soon returned to a stronger footing against its rivals as markets took encouragement from suggestions that talks could still progress before Christmas.

Even so, as Viraj Patel, research analyst at ING, commented:

‘Markets had seemingly priced in a higher probability of a ‘no deal’ Brexit as the fifth round of talks between the UK and EU concluded with the latter stating that discussions are at a ‘deadlock’. Yet, fears of a ‘hard’ Brexit were quickly reassessed – with GBP reversing its 1% fall on the day following reports that the EU’s chief negotiator Michel Barnier is willing to offer a two-year Brexit transition deal.

‘None of this should be new news for GBP markets; contingency planning around a ‘no deal’ Brexit by UK officials seems logical, but in our view should not be a central scenario priced into currency markets. At best it serves as a tail risk, keeping the extent of GBP upside potential limited.’

As a result the Pound still looks vulnerable to Brexit-based uncertainty over the coming days.

Franc Under Pressure as Safe-Haven Demand Weakens

The Swiss Franc struggled to find much traction against its rivals, meanwhile, as the general sense of market risk appetite weakened.

Surprisingly strong Chinese trade data encouraged investors to return to a more risk-hungry mentality on Friday, leaving safe-haven currencies such as the Franc on the side-lines.

Increasing bets over the likelihood of an imminent Federal Reserve interest rate hike also limited the appeal of the Swiss Franc, especially as the Swiss National Bank (SNB) seems unlikely to change its own policy outlook any time soon.

September’s Swiss producer and import prices data failed to particularly bolster CHF exchange rates, even though the figures painted a more positive image of the Swiss economy.

Prices showed growth of 0.8% on the year, a solid uptick from the previous month’s 0.6% growth which suggests that inflationary pressure within the economy is growing.

The Swiss Franc could find greater support next week if the latest trade balance figure highlights a fresh widening of the surplus.

Further signs of strength within the Swiss economy should limit the downside potential of CHF exchange rates, even if risk aversion remains generally muted in the near term.

GBP CHF Could Extend Gains on Rising UK Inflation

Confidence in the Pound is likely to weaken once again in anticipation of Tuesday’s critical UK consumer price index report.

However, a strong showing here could increase the odds of the Bank of England (BoE) raising interest rates before the end of the year.

If inflation accelerates to 3% or higher on the year this may force the hands of policymakers, making an imminent rate hike even more likely.

Markets are thus likely to welcome any further uptick in inflation, even though this would signal that household finances are coming under even greater pressure as the wage squeeze bites.

As Alan Clarke, Head of European Fixed Income Strategy at Scotiabank, noted:

‘The most striking change over the past month has been the change in the Bank of England’s tone. The latest Monetary Policy Committee (MPC) minutes were clearly hawkish and the recent data flow has been upbeat. The combination of both makes a rate hike at the November meeting appear almost certain.’

Any softening in inflationary pressure could undermine calls for a rate hike, though, as the BoE weighs up the risk of potentially transitory inflationary pressures.
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