Jane Foley, senior FX strategist at Rabobank, suggests that today’s releases of weak December and Q4 UK GDP provides stark proof of the headwinds that have been blowing across the UK economy. 

Key Quotes

“The pound has weakened on the data as the market continues to question last week’s policy statement from the Bank that “an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon”.”

“In the past few months the attention of GBP investors has been dominated more by politics than economics, but this morning’s data provides a strong link between the two. There have now been several UK data releases and surveys suggesting that uncertainty related to Brexit has taken its toll on both investor and consumer confidence.  At the same time the pace of global growth appears to be slowing.”

“The fact that as PM May returned from Brussels empty handed last week is a disappointment for GBP. There is no sign that the EU will change any aspect of the Northern Ireland backstop which is heavily disliked by UK MPs.”

“It remains our central view that a deal will be stuck between the UK and the EU pushing a hard Brexit off the table. During the ensuing transition phase that would follow a soft Brexit, negotiations would then turn towards the future trade relationship.  This implies that any initial GBP rally would likely be dampened by continued political wrangling.  On this scenario we would expect EUR/GBP to settle down in the 0.85 to 0.87 area in the coming months.  On a hard Brexit, we would expect EUR/GBP to spike up towards parity.”

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