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Weaker GBP Helps to Drive Exports

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June 6, 2017 By: , No Comments

UK Economy Grows Despite Brexit Concerns

The Brexit referendum ushered in a new era for the UK economy. Scaremongering tactics failed to convince Britons that a Brexit would be detrimental to the national interest. And if short-term economic realities are anything to go by, Brexiteers were justified. The UK economy has shown resilience in the face of adversity. In the aftermath of the Brexit, the sterling plunged to levels last seen in 1985, a 31-year low. However, even these weak levels served the economy well. For one thing, UK exports blossomed as a cheaper GBP made British goods and services more attractive to foreign buyers. Travel and tourism boomed.

 

Perhaps the most notable change to the UK economy came from the FTSE 100 index. The all-share UK index is inversely correlated with the GBP. Since approximately 70% of earnings from multinationals on the FTSE 100 are derived abroad, these revenue streams are worth more in GBP terms when they are repatriated back to the UK. The FTSE 100 index was trading at 6,315.62 the day before the Brexit on June 22, 2016. Today, the FTSE 100 index is 1,200 points higher at 7,525.76. Most all the gains are a direct result of the weakness of the sterling. The 19% appreciation of the FTSE 100 was made possible by a 12% decline in the value of the GBP since June 22, 2016.

 

How is the UK General Election Affecting the GBPUSD?

The UK general elections are taking place on Thursday June 8, 2017. Polling stations will close at 10PM GMT, but already there is widespread consensus that the Tories are in the ascendancy. The latest YouGov polls have the Conservatives ahead by a margin of 42% vs 38% for Labour. According to the voting intention and seat estimates, the Tories will win 305 seats and Labour will win 268 seats. Since the latest polls are forecasting a victory by Conservatives of between 1% and 12%, markets have stabilized and the GBP inched higher at the close of the day on Monday 5, June.

The GBPUSD pair saw an influx of buyers around the 1.2865 level and it briefly moved above the critical 1.29 level in the late afternoon session. What is particularly surprising about the sterling’s performance is the rally despite disappointing services PMI data.  UK services account for 80% of the country’s GDP. However, slowing services PMI data is a concern for the economy. Economists had forecast a figure of 55 for May, but the actual reading came in at 53.8. The reading in April was 55.8. Any figure over 50 represents an expansionary economy.

 

These softer levels indicate a slowdown, but not a reversal. Part of the reason for the slowdown is rising inflation and sticky wages. People are putting big ticket purchases on hold and curtailing their expenditure as they await further clarification about the nature of the Brexit. Many multinationals are considering relocating from the City of London, and this is also adding to the slowdown.

USD Weakness Matches GBP Uncertainty

From the other side, UK construction and manufacturing PMI have not disappointed and strong growth is forecast for Q2, 2017. The needle on the GBP hardly moved with these economic data releases, signaling that the most important concern for the currency is Thursday’s election result. Part of the cable’s inertia is related to the weak USD. Recall that Friday’s NFP data came in under expectation and this sent the DXY to new lows. Geopolitical uncertainty about the UK elections are tempered by USD weakness. As such, we can expect range bound trading for the remainder of the week.

 

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Brett Chatz

About Brett Chatz

Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for spreadbettingreview.co.uk.

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