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Sell British Pound "on the Bounce" Against Euro and Dollar: Strategy Trumps Good GDP Data and Nissan News

UK GDP growth beats expectations

Pound Sterling gained temporary ground after the publication of positive reports concerning the UK economy but the gains could not be sustained, even as short-term UK bond yields trended higher.

  • Pound to Euro exchange rate today (28-10-16): 1 GBP = 1.1148 EUR, day's best rate: 1.1189
  • Euro to Pound Sterling exchange rate today: 1 EUR = 0.8971, day's best rate: 0.8974
  • Pound to Dollar exchange rate today: 1 GBP = 1.2164 USD, day's best rate: 1.2189

Sterling jumped after official growth data, which fully ecompasses the period following the EU referendum, confirmed the UK economy hardly batted an eyelid at the vote result.

However, those gains were soon given up and it looks as though the Pound is going to actually close the day lower than where it started against both the Euro and US Dollar.

In fact, the currency is stuck well within recent ranges which implies that it is going to take some kind of hammer-blow to shift it out of the mud:

Pound Sterling not going anywhere fast

The initial reaction to the strong GDP release was positive as the currency spiked. It was promptly sold on hitting fresh highs implying there is a barrage of sell orders to be had on any wayward spikes. 

“The medium to longer term view remains to sell Sterling on the bounce pretty much across the board,” say Citibank in a currency market briefing to clients. “Rising hard-Brexit risk and negative impacts of the Brexit referendum may be reflected in economic data gradually.”

In short strategy has a hold over the UK currency and until traders get some real confidence in the UK's economic outlook we would expect it to struggle.

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GDP growth for the third quarter 2016 stood at 0.5%, ahead of economist forecasts for 0.3%.

"Today’s UK GDP figures confirmed that the immediate economic impact of the vote to leave the EU has not been nearly as severe as many had initially expected," says Ruth Gregory, UK Economist at Capital Economics. "Back in July the consensus expectation had been for an outright contraction in GDP, of -0.1%."

Annual GDP growth for the year now stands at 2.3%, ahead of expectations for 2.1%.

The Index of Services data released alongside the GDP figures showed growth in the UK's largest sector remains at 0.8%, strength which has surprised some analysts.

No doubt inbound tourism on the back of a weaker Sterling will be having some influence here.

In all, the data presents a strong beat on expectations and suggests that the Bank of England has little reason to cut interest rates again in November; something that would benefit the Pound.

"The stronger-than-expected activity data should prevent the Bank of England from further loosening its monetary policy at the November MPC meeting, in line with our recently changed BoE forecast. However, our baseline sees no more rate cuts over the forecast horizon, we still believe that risks are tilted towards further monetary policy easing in 2017," says Johnny Bo Jakobsen at Nordea Markets.

Indeed, UK gilt yields have risen notably on the news confirming another rate cut at the Bank is being seen as increasingly unlikely:

 

 

Historically the rising gilt yields would have been echoed by Sterling - they have stuck together for many years.

Yet the rising gilt yields in October have not been met by a notable rise in GBP which makes us wonder whether there is an impending move higher in the currency ahead as this anomaly is rectified. 

Some analysts have pointed out that gilt yields are now rising as the UK is seen as 'risky', but that yields rose on the back of today's strong data and they have would partially negate the view.

Nissan to Invest - Here is the Real Reason Why

Another big shot in the arm for UK economic confidence is that Nissan today announced, following its Executive Committee meeting, that it will produce the next Qashqai and will add production of the next X-Trail model at its Sunderland, U.K. Plant.

Nissan said the decision was owed to the U.K. government’s commitment to ensure that the Sunderland plant remains competitive.

Nissan said will increase its investment in Sunderland, securing and sustaining the jobs of more than 7,000 workers at the plant.

Some commentators have suggested that monetary sweeteners have been offered to Nissan by the Government, but we think common sense has prevailed.

According to research by think-tank Civitas, car manufacturers in Europe would suffer the most, facing the cost of £3.9 billion in tariffs on goods exported to the UK - three times the £1.3 billion in tariffs that could hit UK car manufacturers.

On a country-by-country basis, exporters in 22 EU economies benefit more from bilateral free trade with the UK than exporters in the UK to them.

Nissan are betting that EU will ultimately allow tariff-free trade in vehicles based on the sums involved.

Sterling's Next Moves

Is the worst over for Pound Sterling? This is the big question we at Pound Sterling Live continue to ask and judging by feedback from readers this could be a view shared by most people with an eye on the market.

The problem is finding a consensus view on whether Sterling has seen the worst pass is nigh impossible.

Analysts are split on the prospects for the currency going forward, and therefore it is up to readers to decide who offers the most compelling argument.

An interesting split in views can even originate in a single institution - take Societe Generale for example.

Analyst Oliver Korber told us recently that he believes the worst for the Pound has passed.

“A fast and imminent continuation of the bearish trend at this stage is unlikely because a lot of UK bearishness is already priced in the exchange rate,” says Korber.

However, his colleague Kit Juckes tells us today:

“Sterling is vulnerable to a sharp spike slower even if relative rates and the scale of the economic hit suggest the bulk of the Brexit have been made.

“That's the opposite of the situation for the Euro, where the grind lower in EUR/USD as the markets become more confident of a December rate hike contrasts with the danger of a sharp spike higher if, for example, the ECB fails to extend its bond-buying programme.

“Take those two together and the risk of a sharp move higher in EUR/GBP remains clear.”

One says the worst is over, one says there is more to come.

But it is worth pointing out that Korber does say there remains potential for declines, yet these declines are likely to be short-lived.

So, here we get a sense that different timeframes are being observed and both Juckes and Korber could in fact be rowing in the same direction.

What is for certain however, is that Sterling's future weakness almost certainly rests with ongoing discussions surrounding Brexit.

We believe that should the negative pre-negotiation headlines have already been flushed out then the propensity to weaken the currency further diminishes.

May is a Brexit Softie

What is abundantly clear is that Sterling remains focussed on headlines surrounding Brexit.

“Who said the Pound was moving on fundamentals this week? Oh, yes, that was us. We were wrong, the pound is back moving on political headlines,” says Kathleen Brooks at City Index.

We have seen through the course of the week how commentary from Theresa May and Philip Hammond have driven the currency.

We expect this to continue.

Indeed, the private thoughts of Theresa May on the EU were laid out mid-week when a secret recording of a meeting between the now-Prime Minister before Brexit confirmed she is acutely aware of how important the single market is to the UK economy.

“She sounded concerned at the prospect of businesses leaving the EU in the event of a vote to Leave, and even sounded supportive of the UK remaining in the single market,” says Brooks who has credited the recording for some of the upside in GBP/USD today.

The views do serve to confirm that May's pre-referendum views are “at odds with her recent comments, which appeared to sacrifice the UK’s membership of the single market in return for complete control over EU immigration,” points out Brooks.

That the leak was published by the Guardian already suggests there would be a left-leaning slant to how the leak is presented and we would point out a couple of startlingly obvious points:

1) Theresa May was a Remain campaigner and we already knew she thinks the single market is important
2) You don’t go into battle waving a white flag, i.e you don’t enter Brexit negotiations with an incredibly defiant EU by letting them know your concessions months in advance. We believe therefore that there is an absolutely misplaced emphasis on so-called hard-Brexit. 

If markets wake up to this fact then we believe Sterling should head higher.

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