Pound subdued despite strong economy
Yesterday was a mixed day for Sterling. We had the latest Industrial and Manufacturing numbers, which beat forecasts showing 0.4% growth, showing the these sectors are still robust. Manufacturing output is at it’s highest in over 10 years! A UK GDP estimate also came in above forecast at 0.6%, showing that the UK economy is actually in very good health, despite warnings that the vote to leave the EU would cause a recession and nearly a million job losses. The reality is unemployment levels are now at their lowest since the 1970’s.
The strong economic numbers from the UK didn’t however cause any gains for the Pound, with GBP/EUR rate still stuck in it’s range at around the €1.13 level. The reason that Sterling didn’t strengthen was the fact that Trade balance numbers were lower than markets had been expecting.
Despite the fact that UK economic figures continue to show the economy is doing very well, the Pound is unable to make any gains due to the uncertainty about Brexit. In my view, this isn’t going to change any time soon until we see some clarity on what a UK/EU trade deal will look like.
When will the Pound go back up against the Euro?
Longer term there is every reason to believe that the Pound/Euro rate will rise back to the €1.20 level we were close to a year ago, however this is unlikely to happen in the short to medium term due to the uncertainty I mentioned above.
Moving forwards, I think it is very likely a good trade deal will be agreed, and the closer we get to this, the higher the Pound will go. When you look past the EU and look at what individual European nations want, then it’s clear that they understand a deal that works for the UK and EU is in everyone’s interest. Many countries including Germany would be happy for the UK to continue allowing access to markets, including for Financial services, in return for the UK paying into the EU budget. This is a model that is currently used by other countries that are not part of the EU such as Switzerland and Norway. However, the EU itself doesn’t seem to be exploring what would be best for the 27 nations it represents, and instead seems intent on ensuring the UK gets a poor deal, perhaps in order to dissuade any other countries from wanting to leave, despite the fact that this might not be the best thing for the EU.
What could move exchange rates today?
At 10am we have EU industrial production numbers, and an ECB monthly Policy meeting. Any hints that they will continue monetary stimulus in the EU could weaken the Euro and help push GBP/EUR back above €1.13 again. There’s nothing of note from the UK other than a BoE Credit conditions survey that is due to be releases as I write this post.
Over in the USA we have a host of inflation numbers, Jobless claims and a monthly Budget statement, all of which could move the GBP/USD rate.
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