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UK Industrial Output Set to Surge with Weak GBP

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March 22, 2017 By: , No Comments

Pounded Left and Right but Standing its Ground

the GBP/USD currency pair is trading at a rate of 1.2472, up 0.9092% or $0.0112. The currency pair has been testing the support level at 1.2110, but it is moving increasingly higher as bullish sentiment about the GBP continues to gain traction. The resistance level appears to be holding around 1.2570, as the GBP inches higher against the greenback. Long-term, currency traders and analysts are speculating that the GBP will move south against the greenback as Brexit-related weakness impacts the UK economy. The key resistance level of 1.2570 was reached on 24 February 2017. Long-term, the trend for the GBP/USD is negative and further declines are expected. The 1985 figure is 1.0520, that seems a long way off from the current level of 1.2472. Nonetheless, a negative trend is likely if multinational banks and financial institutions exit the City of London and elsewhere in the UK post-Brexit.

 

GBP USD

 

How Do British Manufacturers Feel about a Weak GBP and Export Potential?

UK manufacturing optimism has increased sharply in recent days. Thanks to GBP weakness since the June 23,016 Brexit referendum, manufacturers are able to sell more of their wares overseas. The level of optimism is the highest since Prime Minister John Major was in office, thanks to data collected by the CBI lobbying group. If current projections come true, manufacturing will grow at its quickest pace in 22 years in 2017. Of course, the GBP needs to play ball. We are seeing a slight reversal taking place in the strength of the pound, as dollar weakness comes to pass. On 15 March 2017, the Fed FOMC met and decided to hike interest rates in the US by 25-basis points. This should have strengthened the USD, but instead it resulted in USD weakness. The reason being: no mention was made of additional rate hikes in the US, and currency traders when short on the USD. Since then, the GBP/USD pair has rallied dramatically.

 

Strong Growth for UK Economy Expected to Continue on the Proviso That…

GBP strength is unlikely to last however. There are several factors working against a strong pound, notably the imminence of Theresa May’s decision to invoke Article 50 of the Lisbon Treaty. If projections are correct, she will do so in April 2017. This will spur a run on the pound, and with the European Central Bank (ECB) looking to hike interest rates in Europe, the GBP will come under further pressure. Across the Atlantic, the Fed is likely to implement at least 2 additional rate icing 2017. These will have the effect of strengthening the USD, despite the short-term bearish movements we have seen taking place. As UK manufacturing output expands, we are going to see a decline in the consumption of UK services output. A weak GBP means that everyday Britons will find it increasingly difficult to purchase goods and services from abroad. And, personal disposable incomes will shrink if multinational corporate leader UK. The manufacturing sector only comprises 10% of the UK economy while services comprise 80% of GDP. In March 2017, UK export orders hit their highest level in 3 years and growth was robust.

 

Spread betting brokers have noticed an uptick in long positions for UK manufacturing companies. This makes sense given that a weak GBP is actually lifting demand for exported UK goods. In the survey, 16% admitted that their orders were below average while 25% said that their orders were higher than average. UK producers are benefiting immeasurably from increased trade flows and the weak GBP. On the flipside, UK manufacturers are heavily reliant on imported goods to produce their exports. The net effect of higher import costs and higher export volumes is a marginal gain for UK manufacturers.
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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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