Sterling down despite stronger GDP figures – October 2016

Post Brexit Slump for Pound?

Sterling down further today, even though we had stronger-than-expected third-quarter GDP data failing to allay worries Britain’s vote to leave the European Union.

Sterling has lost almost a fifth of its value against the dollar since the June 23 vote for Brexit, and there had been worries that the economy would also take an immediate hit as foreign investment dried up and consumers lost confidence.

Thursday’s data showed that the economy grew 0.5 percent in July, August and September, with growth accelerating to 2.3 percent on an annual basis – the strongest pace in more than a year.

This is very much in line with what we’ve been seeing since the start of October, where the market no longer has been looking at economic data that refers to a period in the past.

Politics this month has taken precedence over the economic data, sterling appears to be looking ahead into what still is political uncertainty.
Sterling is on track for a more than 6 percent monthly fall against the dollar – its weakest performance since June – after having fallen only gradually between July and September.

Against the euro, which has itself fallen sharply this month, the pound is down 3 percent on the month.

Focus will now shift to the Bank of England’s latest quarterly inflation report and monetary policy committee (MPC)meeting next week.

In early September, the BoE said it was likely to cut rates again this year if the economy slowed.

However, sterling’s weakness, a rise in inflation expectations and the latest growth data have prompted most to rule out a Nov. 3 cut.

While we think that sterling volatility narrowly favours the MPC to stay on hold for now, we suspect it is only a matter time before a deterioration in the real economy gives the BoE sufficient reason to take the Bank rate to its effective lower bound.


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