🔔 Economic Overview from moneycorp

The pound’s fate remains inextricably tied to that of Brexit, but November saw some spikes as positive signs and rumour gave the pound some moments to take advantage of the euro’s vulnerability due to ongoing wrangling over the Italian budget.

Brexit optimism helps the pound

At the beginning of the month, a report in the Times about a possible post-Brexit financial services deal saw the pound gain 1% overnight. Before Theresa May presented the proposed agreement to EU officials, a report the following week that the proposal could receive the backing of parliament saw the pound hit a three-week high against the euro.

While rumours gave the pound brief boosts, the reality was that the Brexit deal was finally signed off by EU leaders only after some tense negotiations on key issues.

The initial presentation to the Cabinet prompted a rash of resignations which caused some volatility in the pound. Theresa May has reached an agreement with France over fishing rights and with Spain about Gibraltar, but at home, the situation is less rosy. The DUP are demanding the PM keeps her word about the Irish border and politicians from across the spectrum have come out against the deal.

Parliament is due to vote on the deal on 11th December and until then, the Prime Minister is mounting an intensive charm offensive to try to secure the numbers she needs to win the vote in parliament.

Bank of England weighs in on Brexit

Ahead of the Bank of England Monetary Policy Committee announcement on interest rates, the pound was up 1.06% against the US dollar and 0.55% against the euro. Although there was no change on the interest rate, an indication that interest rates could raise faster than expected once the Brexit picture becomes clear gave the pound another boost and it had the biggest rise in a single day since August.

The BoE made it clear that it was not a given that a no-deal Brexit would lead to lower interest rates, but the market does assume that an orderly Brexit would mean a faster pace of rate increases, and this could be good for the pound.

The BoE’s stress test found that banks would survive any Brexit scenario, but the worst-case saw the pound dropping 25% in value.

Confidence proves difficult to measure

Different reports came out regarding business confidence, with very different results. A survey published by HSBC suggested that three quarters of UK firms are confident about post-Brexit trade.

In contrast, Lloyds Bank's survey of UK businesses found confidence falling across the board to its lowest level this year. Standard & Poor's predicted that a no-deal Brexit would lead to recession.

The pound would benefit from a more unified picture of business confidence, particularly if it were positive, but until then the results suggest that the market remains uncertain about the potential impact of Brexit.

Watching the numbers

Britain’s construction sector results came in higher than expected, but the services sector PMI fell from 53.9 to 52.2, missing forecast by more than a full point and touching its lowest level since immediately after Brexit. Britain report 0.6% growth in GDP for the third quarter, in positive contrast to the Eurozone which showed just 0.2% for the same period.

Less positive were the UK’s borrowing figures, which showed that the deficit rose to £8.8bn from £7.2bn last year, the biggest October figure for three years, and significantly higher than the £6.1bn that was forecast.

There was a caveat from a Treasury spokesperson who declared it the government's best year-to-date performance since 2005. Despite this qualification, the pound trended lower after the numbers were released.

In the face of such immense uncertainty over Brexit, there is a need for positive figures to bolster the struggling pound.

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