UK Battles with Brexit Clarity
Investment in the UK remains a contentious issue, owing to the volatility of the Brexit referendum. It is necessary for accommodative Bank of England policy measures to continue into 2017. Analysts are anticipating UK GDP growth to reach 1.9% for the current year, but this will likely contract sharply to just 0.9% in 2017. The good news is that the slowdown is not as bearish as the October 2016 forecast. During Q3 2016, the UK economy grew at a declining rate.
On the upside, the recent slowdown bested forecasts, and it was the service sector that surprised analysts. The UK economy is heavily reliant on the services sector (70% of economic growth). For this reason, contractions that took place elsewhere were offset by growth in services. One of the sectors that has seen a significant downturn is the construction industry. Fortunately, manufacturing PMI expanded during October while the unemployment rate moved lower during September.
How is the GBP Performing against the Greenback?
The GBP/USD currency pair is currently trading at 1.2706, down 0.19% or $0.0023. Over the past 5 trading days the GBP/USD pair has appreciated by 2.44%. For the year to date, the pair is down 13.79%. Much of the trading activity with the GBP is Brexit-based. For the past 7 weeks, the GBP has made incremental gains against the USD, but no major moves have taken place. Any thoughts of a GBP ‘breakout’ have been nixed by deep concerns of what form a Brexit will take.
One of the most important activities taking place this week is the UK government’s appeal to the Supreme Court to overturn the High Court ruling. Recall that Prime Minister Theresa May was ordered by the High Court to present a vote on a Brexit to Parliament. A protracted battle is likely to ensue between those who believe that Theresa May can go it alone, and those who believe that Parliament must have its say. This will invariably impact upon the GBP and the FTSE 100 index and FTSE 250 index.
Will the GBP/USD currency hit the 1.30 handle before Christmas?
Prime Minister May is hoping to initiate divorce proceedings from the European Union by March 2017. Further resistance to the Prime Minister could come from Northern Ireland, Scotland, and Wales. These countries have been vehemently opposed to a unilateral withdrawal from the European Union, and will likely launch legal proceedings to that effect. The impact of political interference in the legal process does not present a pathway to a bullish pound.
The one thing that currency and financial markets detest is uncertainty. We have seen a mini-rally taking place with the GBP since the High Court decision. That has helped to drag the sterling from its 31-year low against the dollar to its current trading level. It is still a long way off from 1.48 to the dollar, but it is inching ever closer towards the critical 1.30 handle. There are several ways to approach the Brexit issue: A hard Brexit, and a soft Brexit. The latter option would incur the UK paying for its right to access the single EU market.
With regards to the Bank of England, it is unlikely that Mark Carney will make any changes to the interest rate the day after the Fed announces a 25-basis point rate hike to the federal funds rate. The issue to consider will be the PMI data which remains above the critical 50 level (over 50 is expansionary and below 50 is contractionary), but is lower than expectations. Another measure is the consumer confidence index. This measure has fallen shy of expectations and it is an integral part of the UK’s economic performance.
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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.