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GBP Under Pressure Again As Brexit Concerns Build

Orbex

UK Economy Still Performing Well

Recent data releases have highlighted the continued robustness of the UK economy in the aftermath of the Brexit referendum decision last summer withInflation having risen steadily over the last twelve years.


Indeed, recent Manufacturing, Services & PMI data sets have continued to outperform, posting stronger than expected results. Markit has noted that the decline in Sterling continues to “be seen as a key driver for growth.” The current depressed levels of Unemployment alongside historically low-interest rates are also likely to be contributing to the boost in UK activity.

Speaking on January 5th, BOE Chief Economist Haldane noted that “near-term data has surprised to the upside.” However, the BOE member also noted that these releases had not caused the BOE to “fundamentally change its view on the fortunes of the economy looking forward.”

The Financial Times recently published an annual survey of economists which revealed that 40% of economists were more pessimistic regarding the impact of Brexit than compared to when they were asked a year ago; In comparison, only 13% were now more optimistic.
UK Trading Conditions Have Improved

For a lot of business, UK trading conditions have improved over the last half a year due to the combination of very accommodative monetary policy and an improvement in global growth. Furthermore, in contrast to consensus opinion, there are as yet no signs that consumers are refraining from spending despite political uncertainty. Indeed, UK consumers have actually continued to borrow to extend their spending.

Data released by the BOE showed that UK net consumer credit stood at £1.9bln in November, the most since March 2005. Despite these positive indications, one of the main factors that has fuelled the UK economy’s resilience over the last six months is the fact that the UK’s trading relations have yet to change as Brexit is yet to officially commence.
Brexit Yet to Commence

Article 50 is due to be officially triggered by the end of March 2017. Despite more than half a year having passed since the results of the referendum, there is still a great deal of uncertainty surrounding the Brexit process. Due to the relative shortness of the two-year period for EU exit dictated by the Lisbon Treaty, several leading business groups, as well as officials such as Mark Carney, have argued for a transition period.

Industries that have complex supply chains, as well as banks and airlines, are threatened with significant disruption from Brexit and a period of adjustment could help them lessen the impact. In December, Chancellor Hammond suggested that the Government was likely to seek a transitional deal to help smooth out the impact of the Brexit process. However, this view is particularly contentious among Brexiteers who fear the move could lead to a “half Brexit”.

If the government were to indicate their preference for refraining from a transition period, this would likely be interpreted by the market as increasing the chance of a hard Brexit on the assumption that trade talks will be more pressured and therefore more vulnerable to collapse. This would likely result in the UK only being able to re-negotiate its WTO membership in the two-year window dictated by the Lisbon Treaty thus indicating no special access to the Single Market.

Potential Transitional Period

Indeed, talk of a transition period in November and December was a key factor in assuaging market fears about the risk of a hard Brexit. GBP price action since October has reflected the binary nature with which the market is viewing UK political news whereby any reports suggesting the likelihood of a hard Brexit have weighed sharply on GBP and any reports suggesting a hard Brexit might be avoided are boosting GBP.


GBPUSD is currently sitting on key technical support at the 1.2130/1.2083 region, which coincides with bearish channel support also. If rice can hold here, look for a rotation backup to test channel resistance.

The next key data releases for the UK will be Industrial and Manufacturing Production released tomorrow at 09.30 GMT.

Source: https://www.orbex.com/blog/2017/01/gbp-under-pressure-again-as-brexit-concerns-build/
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