Softer UK numbers as GBP becomes more data-dependent

GBP is struggling to catch a break right now – in some parts deservedly, in others maybe less so.

It saw some post-election strengthening on what was seen as the end of an unstable period in the UK parliament, but softening data and rate cut chatter from Bank of England Monetary Policy Committee members have unwound that upside.

SOFTENING UK DATA HITS GBP

This morning’s UK GDP numbers didn’t help. Data released by the Office for National Statistics indicated that gross domestic product declined by 0.3 percent in November against consensus expectations of flat growth.

GBP has come under pressure through the session, with the data adding fuel to rate cut speculation driven by comments from the MPC after voting member Gertjan Vlighe suggested that he would vote to cut rates if UK data did not show a rebound after recent softness. In addition, Bank of England colleague Silvana Tenreyro said that she would support a rate cut if the economy slowed.

LIKE IT OR NOT, EVERYTHING STILL ABOUT BREXIT

Those who saw the Conservative Party’s emphatic win in the December General Election as a sign that Parliament would be free of the deadlocks that had blighted Theresa May’s second term (and her first, for that matter) have been proven right so far. The EU withdrawal bill sailed through Parliament at its third reading on Thursday by 330 votes to 231, a majority of 99. The Bill is now in the hands of the House of Lords. While the Conservative Party does not have a majority in the Lords, Parliamentary convention dictates that the UK remains on course for the Bill to be passed and for the UK to remain on course to leave the EU on 31 January.

However, while the large parliamentary majority points to a vastly more orderly Brexit than had perhaps been on the cards if the dealing involved in attempts to get previous withdrawal deals passed had continued, it is of course still important to view data and chatter about BoE decisions through the prism of Brexit.

The GDP data released this morning crucially comes in the period before the general election – data indicates that production fell by 1.2 percent in the month of November 2019, following growth of 0.4 percent in October. Within production, manufacturing fell by 1.7 percent, with part of that decline being driven (sorry) by car manufacturers temporarily shuttering production to mitigate supply line disruptions around the tabled 31 October Brexit deadline that had been heavily defended as a hard line by the Government. We also saw large falls in food and chemicals – these industries were also the main drags on growth in April 2019, just after the UK's original planned date to exit the European Union.

GREATER DATA DEPENDENCY

Of course, monthly GDP data always comes with the caveat that the monthly growth rate for GDP is volatile and so it should be used with caution and alongside other measures, such as the three-month growth rate, when looking for an indicator of the longer-term trend of the economy.

The other side of writing off some of the weaker November data as being Brexit uncertainty-driven is that it piles greater pressure on the December data when it is released on 11 February with 0.1-0.2 percent growth being required to have prevented a fourth quarter contraction in the economy.

No matter the headlines, Bank of England MPC members do not operate on a month-to-month basis. But as we have previously pointed out, as parliament becomes less of an uncertain place, data and its influence on rate setting is going to be an ever-increasing source of GBP pressure.

To discuss any of the items we have covered in today's market update, contact us via info@labardemanagement.com or call us on (+44) 0203 3488 1169

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