Market News & Insights
15 August 2017

UK, Brexit and Sterling All Back in Focus

With PM Theresa May seemingly back at work, the UK takes centre stage again today on a number of fronts. Shortly this morning we get the first round of the latest UK economic data set for this month with the ever important CPI inflation data out along with several other inflation figures.
The headline reading is expected to show inflation rose to 2.7% from 2.6%. Rising inflation to date has been used as an argument for Bank of England interest rate rises with two BOC members, Ian McCafferty and Michael Saunders, maintaining their push for a 0.25% rate hike. However, the other key economic indicators may start to show enough signs of weakness for this hawkish argument to diminish. Out tomorrow, we have UK earnings data followed by retail sales on Thursday. With prices rising faster than average incomes, this is likely to leave retail sales struggling to gain traction. By how much, we will get a better view of over the coming days. This potential to lose economic momentum and more than previously forecasted has led to several leading banks reviewing their currency forecasts. For example, the headline grabber over the weekend being Morgan Stanley’s call for parity in EURGBP in 2018.

The next part of this week’s UK story will be on the political side with the government set to release a series of position papers on different aspects of Brexit. Already this morning, we have just seen the release of the customs paper with the headline piece being the hope of obtaining an interim period after the UK leaves the bloc in March 2019 with a view to striking a permanent deal that potentially preserves much of that relationship. If the papers continue along this ‘fantasist’ theme, then I fear we are in for further sterling weakness as the market is giving the position papers zero ounce of credibility.

Sterling is already at the back foot this morning in response to the first paper. EURGBP in particular had started the morning stronger after the release of German GDP figures at 7am. Growth there rose more than expected with the year on year figure showing a rise of 2.1% versus expectations of 1.9% (up also from 1.7% last month). This again highlighted the diverging contrasts of the UK and the Eurozone’s largest trading bloc. Should a rising EURGBP break the first point of resistance .9088 this morning and then last week’s high of .9118 comes into play again.

The dollar mildly rebounded yesterday primarily on the back of a reduction in recent fears over North Korea (as another scandal engulfs President Trump). GBPUSD has fallen to weekly lows at 1.2933, as much to do with the weakness in sterling as described above. EURUSD too is lower albeit still within recent ranges and light support still seen at 1.1700. On the data calendar stateside today, we have a series of releases with July’s Advanced Retail Sales report being the headline due at 1.30pm.