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UK Weekly Analysis
Brexit Rumours Propel Sterling

David Starkey November 30, 2017

– GBPUSD closing in on best level since Brexit

– British sentiment data bookend weekend

– American employment stats are greenback’s game to lose


Sterling has performed well this week thanks to rumours there’s been headway in the Brexit negotiations. Specifically, reports suggest there’s been progress on both the subject of the divorce bill (purported to be somewhere in the range of €45-€55 billion) and the Irish border. Sentiment in currency markets is that clarity in these areas could be enough to satisfy the EU’s “material progress” threshold. In turn, this might unlock a two-year transition deal and pave the way for negotiations on what Britain’s future trading relationship with the EUR will look like.

The fresh optimism surrounding Brexit has been a boon to the British pound this week. Sterling is up 1% against the greenback so far this week and is approaching its best levels since referendum day in June 2016. Meanwhile, GBP is up around 1.7% week-over-week against EUR, JPY, CHF, and AUD. Furthermore, the pound has advanced 2.3% against the Canadian dollar since the start of the week!

But there will be no cruising into the weekend for the pound. Key PMI sentiment data will be published tomorrow as well as Monday and Tuesday. Respectively, the outlook for UK manufacturing, construction, and service sectors could offer fresh direction to GBP. In particular, the services number will garner attention since this part of the economy represents the lion’s share of GDP.

In the UK, sentiment data during 2017 has been stable despite Brexit uncertainty. On its own, this might be an encouraging sign, but in other developed economy nations, like the EU and USA, 2017 has been characterized by an increasingly more optimistic outlook. This has been driven by broadly positive global demand. The implication is that the UK is underperforming its peers, which in turn could be a weight on the pound going forward. A key indication that the UK might be lagging will be the relative trajectory of GDP in the quarters ahead. Should the UK fail to keep up, another possible consequence is that the Bank of England won’t tighten monetary policy in line with its peers, which once again could weigh heavily on sterling valuations.

UK sentiment data should keep sterling on its toes next week. However, the broader attention of currency markets will be on American labour market data, specifically non-farm payrolls and average earnings results. A strong result will likely be needed to offer fresh support to the American dollar in the short term. As it stands, currency markets are quite preoccupied with a 0.25% interest rate hike which is priced in for the Fed meeting on December 13. Should employment data next week cast doubt on the economic prospects for the USA, it could mean the Fed will hold off on a rate hike, which might in turn lead USD lower.

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