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- GBP steadies despite litany of downbeat data ahead of Tory conference.
- Current account deficit widens, investment falls, GDP revised lower.
- Conservatives' conference looms as instability threatens to haunt GBP.
The Pound steadied into the final session of the week despite a larger-than-expected widening of the currenct account deficit during the second-quarter, a fall in business investment and downward revision to first-quarter GDP numbers ahead of a weekend that could see political instability return to haunt Sterling.
The U.K.'s current account deficit widened to -£20.3 billion during the three months to the end of June, marking a deterioration from a downwardly-revised first quarter deficit of -£15.7 billion.
Markets had looked for a current account deficit of -£19.4 billion and were under the impression the first-quarter deficit was -£17.7 billion until the Office for National Statistics (ONS) revised the latter down to -£15.7 billion.
The current account balance measures changes in the amount of money flowing into and out of the UK as well as movements in British borrowing from the rest of the world.
Markets care about the data because it paints a telling picture of international demand for the Pound while also providing insight into the extent to which the nation is exposed to changes in the sentiments of international lenders toward the U.K.
"Today’s GDP figures left the economy looking a little weaker than before. Q2’s Quarterly National Accounts confirmed that GDP rose by 0.4% on the quarter, but growth in Q1 was revised down from 0.2% to 0.1%. Meanwhile, the composition of growth revealed a rather less healthy picture," says Ruth Gregory, an economist at Capital Economics.
Separately, the ONS said U.K. GDP growth was slower than previously thought during the first-quarter after revising its previous estimate down from 0.2% to just 0.1% due to remeasurements of activity in the then-beleaguered construction industry. Growth for the second-quarter was confirmed at 0.4%.
"This release incorporates Value Added Tax (VAT) turnover data in the output approach to measuring GDP for the first quarter of 2018; GDP growth has been revised down to 0.1% in Quarter 1 2018, driven by a revision to the construction industry, which can in part be attributed to the inclusion of VAT turnover data," says the ONS.
ONS data also revealed a -0.7% fall in the value of business investment into the United Kingdom during the same period. Total investment of £47.5 bililon came as a negative surprise given the consensus was for growth of 0.5%.
"Looking ahead, though, there have been encouraging signs that activity has strengthened at the start of Q3, with three-month GDP growth rising from 0.4% in Q2 to 0.6% in July – a little above the Bank of England’s 0.5% growth projection for Q3 as a whole. So despite today’s figures, we remain cautiously upbeat about the economy’s near-term prospects," Gregory adds.
The Pound was quoted 0.07% lower at 1.3066 against the Dollar following the release Friday while the Pound-to-Euro rate was 0.19% higher at 1.1258. Sterling was in fact higher against most of the other G10 currencies on the morning, suggesting the market's view of the economy and the outlook for Bank of England policy has been little changed by the data.
"While we remain constructive on the big picture outlook for GBP/USD – and see 1.40 at the turn of the year – it’s difficult to ignore the potential downside risks stemming from UK politics over the coming week," says Viraj Patel, an FX strategist at ING Group. "We wouldn’t be surprised to see a hat-trick of GBP sell-offs if the Prime Minister has another difficult conference. GBP/$ at 1.2985 (50-dma) a key sentiment gauge."
Price action comes ahead of a weekend that will see Prime Minister Theresa May address MPs and members of the U.K.'s governing Conservative Party at its annual conference.
Faced with rebellion over her Brexit plans from MPs on both sides of the debate, as well as widespread discontent among party members, markets are attuned to the possibility that speculation over the tenability of May's position could easily renew over coming days.
"The nightmare scenario of a no deal hard Brexit would have serious consequences. The UK economy could fall into temporary stagnation or worse, Eurozone growth would decelerate significantly for a few quarters amid grave uncertainty about industrial supply chains and future access to a major market. We continue to see a 20% risk of a no deal hard Brexit," says Holger Schmieding, chief Eurozone economist at Berenberg Bank.
The conference takes place as officials from both sides of the English Channel push for an agreement on terms of the U.K.'s withdrawal from the EU ahead of the October European Council summit, although some have said an extraordinary meeting could be arranged in November if a deal is not struck the previous month.
The deadline is important because even once a deal is done, it will still have to be signed off by the Council and approved by all parliaments in the European Union. This itself will take time but the Article 50 process governing the Brexit exit currently only provides until March 29, 2019 before the U.K. automatically leaves the EU.
However, disagreement over how to manage the Northern Irish border in the event a trade deal is not agreed at a later date is standing in the way of a deal. The EU rejected PM May's "Chequers plan" at a summit in the Austrian city of Salzburg just last week.
The EU's current Irish border proposal of customs union membership and continued "regulatory alignment" for Northern Ireland would mean either all of the U.K. remaining inside the EU customs union and single market, or a de-facto sea border being installed between the island of Ireland and Great Britain. The latter is something PM May has said "no U.K. Prime Minister could ever agree to".
If the talks fail to deliver a viable deal before early November the odds of a so-called "no deal Brexit" will increase significantly, leading markets to fear the U.K. defaulting to trade with the EU on World Trade Organization terms.
"If and when the nightmare scenario becomes inevitable, we would expect a last-minute scramble to secure a series of stopgap mini-deals to avert the worst, that is to allow planes to fly, lorries to roll, medicines to be shipped etc.. But the EU27 may tie even some of those mini-deals to Britain’s readiness to honour its binding financial commitments, often erroneously called the “Brexit bill“," says Schmieding.
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