Sterling resists Brexit

Swissquote Bank Research Team Swissquote Bank Ltd

The nomination of Boris Johnson as UK Prime Minister has clearly not been beneficent for Sterling (GBP/USD -3% since nomination), which has been falling consequently to tumble at decades low against major currencies. Furthermore, the recent drop in key economic releases, including long-awaited GDP figures for the second quarter have not been of great help. The newly elected PM is expected to face a no-confidence vote in an attempt to safeguard the UK from a hard Brexit when UK MPs will return from summer vacations on 3 September 2019. Meanwhile Irish governing liberal-conservative party Fine Gael confirms it is willing to maintain current backstop deal unscathed with the EU so that negotiations can go smoothly. Investors will look closely at UK labor data due on Tuesday as well as inflation the day after.

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As suggested by the Bank of England monetary policy meeting from 1 August 2019, which decided to maintain its Bank Rate on hold at 0.75%, the economy is expected to grow less strongly, despite the BoE assumption of no Brexit shock, at 1.30% in 2019/2020 from prior 1.50% and 1.60% respectively, a significant shrinkage. The publication of 2Q GDP figures point to similar ends, with the year-on-year gauge given at 1.20% (prior: 1.80%) and quarter-on-quarter in contraction territory, declining by -0.20% (prior: 0.50%). June's indicators are also not very encouraging, with industrial production at -0.60% (prior: 0.50%), manufacturing production in a slump of -1.40% (prior: -0.20%) while trade balance improved (GBP -7 billion; prior: GBP -10.7 billion). Overall, despite optimism related to the UK MPs willingness to break PM Boris Johnson “do or die” pledge by either evict him or force a Brexit extension, it seems that the situation remains far from rosy in the country.

The recent rebound in GBP/USD, currently trading at March 1985 low, is about to turn as upcoming June labor and July inflation data should stay dull while trade war headlines will continue to be at center-stage. The pair is maintained within 1.2080 and 1.20 range.

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Swissquote Bank Research Team

Swissquote Bank Ltd

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