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Sterling Loses Shine Amid Growing Brexit Fears

British Pound
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August 10, 2017 By: , No Comments

The GBP/USD pair is trading at 1.3006, while the GBP/EUR is trading at 1.1065. Both these levels are markedly lower than the pre-Brexit exchange rates. One benefit of a weaker GBP is the enhanced attractiveness of UK exports. Now that foreign currency is worth more in GBP terms, foreign buyers can purchase more British manufactured goods than ever before. This also bodes well for foreign travelers to the UK.

Britain relied heavily on consumer spending to drive economic growth, but decreased real wages and rising CPI have undermined the consumer expenditure component of the economy. The BOE recently commissioned interviews with some 700 businesses across the country, and the broad consensus indicates an uptick in manufacturing activity. A notable change is evident in the volume of imported goods that have now been substituted by domestically produced goods.

 

Manufacturers Benefit from Weak GBP

A weaker GBP, coupled with a recovery in the global economy is helping to drive demand with UK manufacturers. Since June 23, 2016, the trade weighted depreciation of the GBP is down 14%. From the Bank of England’s perspective, manufacturers intend to increase investment over the next year, indicating that bullish prospects remain. There has been a notable recovery in UK services companies since the referendum, and this is likely to continue. The bugbear in the equation remains UK consumer spending. Retail spending has tapered off significantly since mid-2016, in line with consumer services turnover.

When it comes to long-term spending (investment), retail companies are adopting a wait-and-see approach. This is particularly true of UK enterprises that are reliant on foreign trade. The Bank of England is requiring that UK banks comply with strict capital cushion requirements if the economy sours. These initiatives may affect credit lending, and that could taper the economic recovery. UK households are tightening their purse strings by a purchasing less expensive brands. This has a contractionary effect on GDP.

Rising prices could not deter declines in consumer services figures. Entertainment options like dining, hotels, bars and nightclubs grew at a sluggish pace, while manufacturing overtook services. The ONS (Office for National Statistics) indicated that manufacturing had contracted in Q2 2017, while the Bank of England survey indicates that manufacturers reported strong growth trends. On Wednesday, 9 August 2017, the GBP retreated against a basket of currencies, after PM Theresa May expressed surprise at the £36 billion tab for leaving the European Union.

 

A Blueprint for Brexit Is Desperately Needed

Members of the ruling conservative party – those in favour of a Brexit – have vowed to fight the bill, and cautioned that taxpayer money should not be used for it. There has been a degree of infighting during the Brexit negotiations settlement, and various high-ranking officials have alluded to the lack of clarity on the Brexit issue. The GBP tends to rally when negotiators are moving towards a framework for Brexit negotiations. The absence of a ‘Blueprint for Brexit’ does not bode well for the GBP since speculators are prepared to dump it at a moment’s notice.

However, traders have been advised not to react to the hiccups in the negotiating process. From a British perspective, Brexit negotiations have been abysmal. The lack of consensus on how best to negotiate the UKs departure is causing anxiety among pundits, and volatility in the markets. Meanwhile, the USD has shown resilience by staging a minor comeback against its peers on the back of strong NFP data. Across the Atlantic, support for Trump Trade is waning and it’s unlikely that his agenda will pass in a largely lame-duck presidency.

 

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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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