False Start

False Start

Thu 15 Mar 2018


Over the past couple of days, Sterling has enjoyed two optimistic and seemingly genuine rallies that have ultimately all but dissipated within a matter of hours. Yesterday, Robin Walker, the Undersecretary of State for the Department for Exiting the European Union, or David Davis’ sidekick as he might be better known, suggested that the UK and the EU are “very close” to a transitional and implementational deal.


On the news, the Pound leapt by as much as 0.75%, trading only 10basis points short of the psychological resistance level of 1.40 against the US Dollar. Throughout the trading day today, despite further positive news for the UK political economy and a less sanguine outlook for the greenback, cable has still stopped short of 1.40; reaching an intraday high of 1.39944. Against a strengthening Euro, the Pound battled upwards, yet, too failed to break through the psychological Euro support of 1.13; topping out at 1.12969.


As GBPEUR remains in the lower third of its horizontal trading channel, the news does question the support dynamics of the Pound. Ceteris paribus, trading pressures would suggest that we revisit nine-month highs in excess of one euro and fourteen cents to the Pound, however, time is running out on Brexit!


Today, the UK Chancellor Phillip Hammond delivered his Spring Statement; bringing no major surprises to the budget. Despite the high salience of the event, the content of Hammond’s consistent and austerity-biased economic governance remained largely the same. Most substantially, resilient economic performance facilitated the chancellor to constrain net fiscal borrowing to £45.2bn. The major news that supported the Pound, however, was the privilege of the Chancellor to deliver.


The Office for Budgetary Responsibility, in accordance with UK public institutions, the Office of National Statistics and the Treasury, allowed Chancellor Hammond to revise the GDP growth forecast for 2018 marginally higher. Whilst the increase was only by 0.1%, the mild revision of growth from an annualised 1.4% to 1.5% was enough to contribute to Sterling’s appreciation of around 0.62% against the Dollar. After all, 0.1% of GDP is a spare 20 billion Pounds or so in the economy! However, upon wider examination, the story is not all it may seem:


The Chancellor’s announcement coincided both with the dismissal of Secretary of State Rex Tillerson and the publication of underwhelming US consumer price inflation. On a trade weighted basis, the Pound barely scraped through a 25 basis point appreciation. Moreover, the momentum behind the appreciation seemed far less convincing, and was significantly eroded by close of play in Europe this afternoon.





Discussion and Analysis by Charles Porter



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