Brexit is likely to stay front and center for the pound, and bulls seem to be happy about the latest developments. This major economic release is still worth watching, though.
Preliminary Q3 GDP (Nov. 9, 10:30 am GMT)
Time for the U.K. to release its quarterly report card on economic performance! It’s Q3 preliminary GDP figure should give traders a better idea of whether or not Brexit jitters are starting to slow things down.
Analysts expect to see slightly stronger growth of 0.6% in the last three months versus the earlier 0.4% expansion. The monthly GDP likely added 0.1% in September after staying flat during the previous month.
The preliminary business investment figure, which traders typically watch to gauge the impact of Brexit uncertainties on British companies, is expected to post a flat reading after slumping by 0.7% in the previous quarter.
Anticipation for a Brexit deal is building up as word on the street is that PM May has a proposal for the Irish border backstop up her sleeve already and that European Commission officials might be ready to compromise as the clock winds down. Any indication that a deal could finally be struck would bring a lot of relief for sterling while further tension could drag it down.
Keep in mind that more than a handful of Brits might be hatching a plot for another Brexit vote as they believe the current plans being discussed can’t guarantee frictionless trade. A letter signed by more than 50 business leaders stated:
“We are now facing either a blindfold or a destructive hard Brexit. Given that neither was on the ballot in 2016, we believe the ultimate choice should be handed back to the public with a People’s Vote.”
Last Week’s Price Review
After three weeks of net losses, the pound is finally headed for a win since the pound is currently on track to closing out the week in third place (as of 1 pm GMT).
And demand for the pound was fueled largely by (speculative) hopes of a Brexit deal, as well as this week’s BOE statement.
The pound had a steady start but began to encounter sellers come Tuesday. There were no direct catalysts, but as noted in Tuesday’s London session recap, market analysts were blaming lingering Brexit-related anxiety and possible preemptive positioning ahead of the BOE statement.
A direct catalyst did appear during Tuesday’s U.S. session, though, since the pound slumped when credit ratings agency Standard & Poor’s (S&P) warned that the U.K. may suffer a “moderate” recession if a Brexit deal is not hammered out.
S&P also warned that:
“[W]e believe the risk of a no-deal has increased sufficiently to become a relevant rating consideration.”
S&P then added that if a Brexit deal fails to pan out, then S&P will downgrade the U.K.’s “AA” credit rating.
Anyhow, the warning from S&P caused the pound to extend its losses for a few hours before finally finding support.
And when Wednesday rolled around, the pound began to attract buyers again. But as pointed out in Wednesday’s London session recap, there were no direct catalysts for the pound’s recovery.
However, I also noted that market analysts were pointing to possible short-covering ahead of the BOE statement. Moreover, I conjectured that the pound’s rise on Wednesday may have been just be due to month-end flows since ALL pound pairs have been trading lower since October 12.
Anyhow, the pound would get a bullish injection come Thursday, thanks to a report from The Times which claimed that Theresa May has supposedly hammered out a Brexit deal for the very important British financial services industry, which also fueled speculation that a wider Brexit deal will also be hammered out sooner or later.
Theresa May’s spokesman later shot down The Times report, but that didn’t seem to faze pound bulls too much since the pound just kept on trending higher.
Well, the U.K.’s disappointing manufacturing PMI report did cause the pound’s rise to stall ahead of the BOE statement, but that was ultimately just a speed bump since the pound resumed its rise after the BOE statement and presser.
You see, BOE Guv’nah Carney said the following during the presser (emphasis mine):
“Since the nature of EU withdrawal is not known at present, and its impact on the balance of demand, supply and the exchange rate cannot be determined in advance, the monetary policy response will not be automatic and could be in either direction.”
In other words, Carney and company won’t necessarily respond to a “no deal” Brexit by slashing rates.
And since Carney also said that a “no deal” Brexit without a transition period is “not the most likely scenario,” market analysts began saying that if a Brexit deal had already been hammered out or is already within reach, then the BOE would probably have given hints on when the next rate hike would be during this week’s BOE statement.
This week’s BOE statement was therefore seen as hawkish overall, so GBP bulls pushed the pound higher again.
And as icing on the cake a Financial Times report claimed that:
“In a concession to London, the EU would lay out the full terms of a ‘bare-bones’ all-UK customs union in Britain’s exit agreement, avoiding the need to negotiate a second customs treaty after Brexit.”
However, that was the last hurrah for GBP bulls since the pound’s rally stalled after that.