Could Sterling gains be capped?

We have seen the Pound gain against the Euro and US Dollar for the third consecutive day after it was confirmed that GDP grew in the UK by more than expected in the month of December.

The Pound to Euro exchange rate has reinforced gains above 1.18 and at the time of write we are seeing rates in the high 1.18’s. The Pound to US dollar rate is currently sitting in the high 1.29’s, with bulls looking at clawing their way back to the 1.30 mark, a level above which it has spent most of its time since early December.

But could gains be capped?

Whilst it seems that the Pound has found its feet again, we would expect gains to be relatively contained, with markets keeping an eye on EU-UK trade negotiations. Brexit has been the main driving force behind the pounds value, and it doesn’t seem to be changing anytime soon. Headlines out this week concerning the UK’s all-important financial services sector have served up a reminder of the potential negative impact Brexit could likely have on the value of the Pound.

Chancellor of the Exchequer Sajid Javid said the EU should sign up to a “permanent equivalence” regime for financial services that will last for “decades to come” to ensure the UK’s financial services sector can maintain access to the European market after Brexit.

However, the EU’s Chief Negotiator was swift to hit back against the proposals saying in a speech:

“I’d like to take this opportunity to make it clear to certain people in the United Kingdom authority that they should not kid themselves about this. There will not be general open-ended ongoing equivalence in financial services, nor other management or financial agreements with the United Kingdom. We will keep control of these tools, and we will retain the free-hand to take our own decision.”

Negotiations on the future relationship between the UK and the EU are due to start in the first week of March. In the meantime, I think Sterling Euro exchange rate gains will be limited to the low 1.19’s, with support in the mid 1.17’s.