Brexit Briefing: Britsh Pound Uncertainty is Certain

Talking Points:

- GBPUSD drops to six-week low on poor manufacturing PMI.

- UK household borrowing also falls for 2nd month in a row, meaning BoE will be in no mood for rate rise.

- PM May faces Brexit Bill defeat in Lords.

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The British Pound came under selling pressure Wednesday – with GBPUSD dropping below 1.2400 for the first time since mid-January after growth in the UK manufacturing sector slowed more than expected in February. The UK manufacturing PMI dropped to a three-month low of 54.6, missing expectations of a fall to 55.7.

Growth was still well above the sector's long-term average of 51.6, and the survey still suggests that the sector carried a decent amount of momentum into 2017, with IHS Markit, which carried out the survey, pointing to "solid growth of production and new orders during February”.

But economists are warning that the fall in the overall new orders balance, from 57.4 to 56.3, is another warning sign that domestic demand has weakened significantly due to the impact of price rises from the weaker post-Brexit Pound.

It’s a similar story with Wednesday’s data on UK household borrowing released by the Bank of England. Mortgage approvals for new house purchases rose from an upwardly revised 68,266 in December to 69,928 in January, above the consensus forecast of an increase to 68,650. That’s the fifth monthly rise in a row, and also higher than the average level of 68,700 seen in the six months prior to the Brexit vote.

But the BoE reported that overall household borrowing fell for a second month straight for the first time since 2012. Coming on the back of Bank of England Governor Mark Carney’s recent comments about wanting to see British consumers either reign in their spending or keep up borrowing to ward off rising prices, it’s a reminder it’s in no mood to alter its stance on keeping interest rates low before Brexit uncertainty subsides.

That’s not good news for Sterling, which on Wednesday dropped to a six-week low of 1.2280 versus the Dollar (with the Greenback buoyed by the prospect of a US rate hike) and the Euro (with the single currency pepped up by higher inflation in Germany).

It’s also more bad news for PM Theresa May, who is facing the prospect of her first Brexit Bill defeat in the House of Lords. Opposition Labour peers reportedly believe they have enough numbers to amend the bill to guarantee the rights of migrants from the EU who are living in the UK. It doesn’t mean the defeat of the Bill, which will enter the so-called ‘ping pong’ period between the two houses in Parliament. May is likely to use her majority in the House of the Commons to vote down the amendment. But the House of Lords defeat brings more Brexit uncertainty, which equals more Sterling uncertainty.

Brexit bill timeline:

March 1

This begins the committee stage, when proposed amendments are discussed in more detail.

March 7

The peers debate the final wording of the bill and vote on any possible amendments. These amendments go back to the House of Commons for its approval. The bill is passed back from house to house – the so-called ‘ping-pong’ period until they both agree on the details of the bill.

There is no exact timeline for this, though the Lords expects to send the bill to the Commons for the final time on the week of March 13. The government has said it expects to trigger the Article 50 formal departure by the end of March.

Markets

--- Written by Oliver Morrison, Analyst

To contact Oliver, email him at oliver.morrison@ig.com

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