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UK Economy Overcoming Brexit Blues; Theresa May Struggles at G20
More than two months after its historic decision to leave the European Union, the United Kingdom’s recovery has shown little signs of abating. However, as Prime Minister Theresa May found out at the G20 Summit this weekend, world leaders would rather wait for a resolution to the so-called Brexit before negotiating a new trade deal with the UK.
The UK’s service sector rebounded sharply in August, a sign the economy was weathering the Brexit after-shock. The Markit UK services PMI rose 5.5 points 52.9 in August after plunging to an 89-month low in July.
“The sector’s inertia lifted in August with a rise in both new orders and overall activity after the lull following the EU referendum. Whereas in July new work fell at the fastest rate since March 2009, August saw record month-on-month increases in both the activity and new business indices,” David Noble, group CEO at the Chartered Institute of Procurement & Supply, said in report on Monday.
Services activity accounts for roughly 78% of the UK’s gross domestic product, up from 69% in 1995, according to The World Bank.
The latest PMI data joins a growing list of economic reports that includes GDP, retail sales and employment showing the UK is weathering the Brexit storm. A plunging British pound has also made the UK a more attractive destination for tourists, helping to bolster retail spending.
While the short-term outlook has improved, the Bank of England (BOE) is preparing for the worst. The Bank eased monetary policy last month for the first time since the financial crisis and could ease further in the coming months to counteract what is widely expected to be a sharp slowdown in economic growth.
GBP/USD: Pound Breaking Free of Brexit Worries
Sterling marched higher against the US dollar on Tuesday, following on from yesterday's gain when the UK services PMI surprised on the upside and provided further evidence that the Brexit panic was possibly slightly over cooked.
Yesterday's services PMI, which marked the strongest rebound in the history of the gauge, came amid a raft of improved UK data recently as markets settle down after the panic which spread across markets globally in the wake of the June 23 referendum result to exit the EU.
Early in the European session the cable currency pair was trading 0.32% elevated at £1.3346, having jumped to a seven-week high of £1.3375 yesterday after the release of the services PMI before pairing its gains somewhat.
All this comes amid last Friday's rather tepid non-farm payrolls report in the US, which brought into question whether the Federal Reserve will hike rates at this month's meeting, and subsequently put pressure on the US dollar.
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UK Manufacturing Production Slides 0.9% for July
July UK manufacturing production fell 0.9% following a 0.2% decline the previous month with the year-on-year increase held to 0.8%. The monthly decline was the steepest for 12 months and below expectations of a 0.4% fall.
Overall industrial production rose 0.1% for July, stronger than the expected monthly decline of 0.3%, with a 1.0% gain for the latest three months to give an annual 2.1% advance.
This was the first data to encompass the post-referendum period.
Overall production levels were boosted by rising oil and gas output for the month with planned maintenance delayed until this month, which will undermine oil output for September. Pharmaceutical output declined sharply over the month, maintaining recent volatility, while there were strong gains for the transport sector.
In the three months to July, total production was still 7.6% below the 2008 peak with manufacturing 5.2% lower, which illustrates persistent underlying structural weakness.
There was a relatively upbeat assessment of the industrial outlook in the August CBI survey, while the PMI manufacturing index also rebounded strongly for the month to a 10-month high. There will, therefore, be expectations of stronger industrial data over the next few months.
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UK RICS House Price Balance Improves in August
UK home values accelerated slightly faster in August, a sign that the market was stabilizing after the June 23 Brexit vote, the Royal Institution of Chartered Surveyors (RICS) reported Thursday.
The RICS house price balance, a level of diffusion index that measures surveyors’ outlook on UK house prices, came in at 12% in August after plunging to 5% in July, a more than three-year low. This essentially states that 12% of respondents saw a rise rather than a fall in house prices. A median estimate of economists forecast no change from the previous month.
The RICS indicator has been trending downward since March, but has seen its losses accelerate since the United Kingdom voted to leave the European Union in June. The so-called Brexit has had a minimal effect on the UK economy so far, but is expected to have a more noticeable impact on business confidence, consumer spending and overall growth heading into next year.
The two-year window required for the UK to negotiate new trade terms with the rest of Europe could have an adverse effect on the country’s real estate sector, especially in high-end markets such as London. According to David Davis, the recently appointed Secretary of State for Exiting the EU, Downing Street will formally notify Brussels of its intent to leave the EU by the beginning of next year.
Since voting to quit the EU on June 23, the British economy has been remarkably agile, with consumer spending and employment rising. A weak British pound has also given foreigners greater incentive to visit the UK, as evidenced by the rise in retail spending over the summer.
UK Manufacturing Data Pressures British Pound, Seen Off Recent Highs Against Euro and US Dollar
Pound Sterling trades lower against its major competitors as the recent rally corrects from overbought conditions with some of the move justified by the latest official manufacturing data.
Traders were seen booking profits on the recent rally in GBP levels having noted the heavy selling pressures that meets the currency in the run up to 1.20 against the Euro and anywhere north of 1.34 against the US Dollar.
The decline comes after three weeks of gains for the UK unit which saw the UK currency starting to look tired and overbought.
"With much of the recent bounce being positioning related, the current rally looks to be an attractive opportunity to be considering shorting the unit if not against USD then on commodity crosses & EUR," says a currency strategy note from Citibank.
Indeed, a note just in from Lars Henriksson, FX Strategist at Handelsbanken, shows he thinks the rebound in GBP is now finished as his studies indicate the Pound is now close to fair-value levels.
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July 2016 UK construction output 0.0% vs -0.8% exp m/m
Details of the July 2016 UK construction output data report 9 September 2016
Better than expected by virtue of not being as bad as expected. The construction numbers could well give the final GDP revision a little boost but we'll nearly be in October by the time we get that.
GBP/USD forecast for the week of September 12, 2016
The GBP/USD pair initially tried to rally during the course of the week but as you can see we did find enough resistance at the 1.35 level to turn things back around, and form a massive shooting star. This is a market that has been struggling for some time now, especially as the British had voted to leave the European Union. As long as we have those concerns out there, and it looks like we will for the foreseeable future, I believe that the British pound is going to continue to sell off. The fact that we formed a shooting star suggests that we will have sellers come back into this market, and perhaps reach towards the 1.2850 level given enough time. I think that it could be very choppy between now and then, but that seems to be that general direction that we are heading.
A break above the 1.35 level would be rather bullish, and could have this market looking for 1.40 given enough time. There is a gap on the daily chart though, so it’s really not until we get above the 1.3650 level that we have cleared that. Ultimately, I still believe in the downtrend in general, because there so much in the way of uncertainty when it comes to the British pound. In fact, I believe that a lot of the “rally” has had more to do with the fact that traders went to summer vacation shortly after that vote than anything else. I don’t think that there’s been some type of massive change in sentiment, and therefore I think as volume picks up we will start to see sellers jump back into this market. In fact, I believe that we are probably going to start reaching even lower, and I fully anticipate that this market will reach down to the 1.25 level over the course of the next couple of months. At this point in time, if you do not wish to hang onto a longer-term trade, there should be plenty of selling opportunities on short-term charts as well.
GBP/USD Outlook: Monetary Expectations Crucial
Forward guidance from the Federal Reserve and Bank of England, allied with pivotal data releases, will set the market direction for the week ahead with the potential for sharp GBP/USD moves.
After peaking at seven-week highs above 1.3400 against the dollar early in the week, Sterling was pegged back by a slightly firmer dollar and a generally dovish tone from Bank of England Governor Carney with a move back below the 1.3300 level on Friday.
Overall monetary policy expectations of both sides of the Atlantic will play a dominant role during the forthcoming week. Even if the data does not have a decisive impact on the short-term policy outlook, there will be a potentially important impact on the medium-term expectations, which will inevitably have a crucial impact on GBP/USD and lead to a potentially high degree of volatility.
US influences will be watched closely early in the week with comments from Fed Governor Brainard very important for US interest rate expectations, especially as she is very much on the dovish end of the FOMC spectrum. Any hints of a Fed tightening the following week would tend to push the dollar sharply higher, while a dovish policy stance would trigger fresh doubts surrounding the potential for any US move.
There is a heavy schedule of UK data releases in the forthcoming week as well as the latest Bank of England policy meeting and volatility is likely to remain elevated even without the additional impacts of dollar moves and global turbulence.
UK Leading Indicators Unchanged for July
UK leading indicators were unchanged for July following a 0.3% decline for June and breaking the run of two successive monthly declines. Although offering some reassurance, there will be the risk of a renewed downturn if UK equity markets are subjected to sustained selling pressure.
The coincident indicator increased 0.3% for June with the gap between the leading and co-incident indicators, although still wide in historic terms, continuing to narrow over the month.
The latest downturn in leading indicators is the most significant since 2012, although it is still early to assess how severe any slowdown is likely to be given the short duration of the recent retreat.
Business surveys released during September suggest there has been a significant recovery from the sharp decline seen immediately after the vote, while official data also suggests the overall impact has been limited with consumer spending still buoyant. There will still be important longer-term uncertainties surrounding the underlying economic dynamics, especially with the risk of weak investment spending.
Overall evidence is still inevitably patchy at this stage and the underlying performance is likely to have been flattered by a strong performance in equity markets during the month. In this context, there could be increased vulnerability if equity markets slide. Nevertheless, the data overall will tend to offer further short-term optimism that any downturn in the economy will be relatively mild.
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Range Remains Tight in GBP/USD
GBP/USD is down 0.44% near the 1.3275 level in today’s trading after the release of U.K. PPI. Producer output prices rose 0.1% in August with the annual increase rising to 0.8% from 0.3%. This was the highest annual increase since the end of 2013, but below market expectations of a 0.3% monthly rise. Today’s downside bias does little to change the fact that the pair is holding in a tight range ahead of other key economic events on the calendar this week.
The main event for trading this week is the Bank of England rate decision on Thursday. The BoE is forecast to leave its key rate at a record low 0.25 percent and the asset-purchase target at 435 billion pounds ($580 billion). The focus will be on the Bank’s policy statement regarding economic performance since its last meeting in early August, when most officials were biased toward another rate cut this year.
Ahead of the BoE decision on Thursday, employment data is due Wednesday while retail sales is set for release on Thursday. Recent economic data from the U.K. has been good, indicating that the Brexit impact has been muted. Continued strong data would support the sterling, resulting in an upside breakout from the current tight trading range.
Chart support still remains intact at the down-sloping trendline defining price action since late June. This trendline, which is reinforced by the 20-day moving average, was tested and held on Monday. A drop below the trendline would leave the target at the late August corrective bottom at 1.3060. With overbought conditions no longer a factor, the probabilities currently appear to favor stabilization in the pair head of this support level.
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