GBP facing renewed uncertainty - AmpGFX

The GBP appears vulnerable to ongoing heightened political uncertainty as disparate forces in parliament fail to present a unified Brexit position, according to Greg Gibbs, Analyst at Amplifying Global FX Capital. 

Key Quotes

“Recent UK economic reports suggest that BoE talk about possible rate hikes later this year were premature.

• The UK economic surprises index fell sharply last week to -34%.
• UK manufacturing production rose 0.4%y/y in May, weaker than 1.0% expected.
• UK construction spending fell 0.3%y/y in May, weaker than +1.1% expected.
• UK trade balance was weaker than expected.
• UK NIESR GDP estimate for the three months through June was 0.3% 3mth/3mth, pointing to an another weak quarter in Q2 after the low Q1 GDP result of 0.2%q/q, below the long-run trend of 0.6%.
• UK Halifax house price index slowed to 2.6% 3mth-y/y in June, below 3.1% expected, a low since 2013.
• All three UK PMI indicators fell, and were weaker than expected, although they remain above 50.”

“BoE Governor Carney said on 28 June that spare capacity in the UK economy had eroded, and the more it does, the BoE’s “tolerance for above average inflation falls.”

“He said, “The extent to which the trade-off moves in that direction will depend on the extent to which weaker consumption growth is offset by other components of demand including business investment, whether wages and unit labour costs begin to firm, and more generally, how the economy reacts to both tighter financial conditions and the reality of Brexit negotiations. These are some of the issues that the MPC will debate in the coming months”.”

“The recent data suggests that Brexit risks may be just starting to spill over to weaker business confidence.  Labour data is due this Wednesday, and they may fail to impress, considering the recent trend in activity indicators.”

“GBP has been relatively stable in the last week, despite the soft data.  Non-commercial speculative futures positions in GBP on the CME are still short, but by the least amount since March.”

“The market may be flirting with the idea that soft-Brexit supporters are gaining the upper hand in parliament, and may lead the UK to an outcome which is more business friendly.  However, uncertainty remains high, deep divisions over Brexit remain prominent, and it is far from clear that any other Prime Minister would command the power to lead a unified UK position in Brexit negotiations.”

“The economy appears at risk of lagging the rest of the world, and this will only intensify political uncertainty, leaving the GBP vulnerable to slipping back towards previous lows.”