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GBP/USD Muted Following UK GDP, Brexit Latest Remains Dominant Driver

GBP/USD Muted Following UK GDP, Brexit Latest Remains Dominant Driver

2020-10-09 06:45:00
Justin McQueen, Analyst
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GBP/USD Price Analysis & News

  • UK GDP Misses Expectations, GBP Muted
  • Brexit Remains the Dominant Driver for GBP
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UK GDP Misses Expectations, GBP Muted

UK GDP for August grew 2.1%, notching a fourth consecutive monthly increase, however, the figure was notably below expectations of 4.6%. Additionally, while UK growth is now 21.7% higher than its April low it remains 9.2% below pre-COVID levels. More than half of the contribution (1.25ppts) to GDP in August had stemmed from the accommodation and food services sector amid the continued easing of restrictions, while the “Eat Out to Help Out” scheme also boosted consumption. In reaction, GBP/USD saw a very muted reaction and thus continues to hover around 1.2950. Keep in mind, that the monthly GDP figures a typically a volatile reading, while the data which provides a rear view mirror of the UK economy will unlikely move the needle for the Bank of England, who are likely to increase QE at the November monetary policy report.

GBP/USD Muted Following UK GDP, Brexit Latest Remains Dominant Driver

Source: ONS

GBP/USD Muted Following UK GDP, Brexit Latest Remains Dominant Driver

Source: Refinitiv, DailyFX

Brexit Remains the Dominant Driver for GBP

As we near the de-facto deadline for a Brexit agreement (Oct 15th EU Summit), EU-UK trade negotiations will remain the dominant driver for GBP. As it stands, fisheries is among the key stumbling blocks to making an agreement, however, given its small contribution to growth overall in the UK, it is unlikely to lead to a breakdown in talks and thus my base is still for a deal to be eventually made. In turn, GBP sensitivity to Brexit related headlines will remain heightened.

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