Pound Seen Benefiting From Signs of Brexit Thaw as GDP in Focus

  • U.K. third-quarter growth seen steady in Wednesday’s data
  • Greater optimism on Brexit could send pound higher: SocGen

After underperforming most major peers in so far October, the pound could gain support this week as Brexit talks look to have finally made some progress.

Sterling pared weekly declines as European Council President Donald Tusk said on Oct. 20 he hoped the negotiations would move onto the second phase in December and added that reports of a deadlock had been exaggerated. Meanwhile, U.K. Prime Minister Theresa May said the discussions had been positive and German Chancellor Angela Merkel urged both sides to work together to make progress.

U.K. gross domestic product data due this week is unlikely to shift the odds of an interest-rate increase by the Bank of England, say analysts, and more positive news flow on Brexit could buoy the currency. Sterling weakened 1.6 percent against the dollar this month to $1.3191 as of 4:30 p.m. in London on Friday, the worst performance after the New Zealand dollar among the Group-of-10 currencies.

“The European Union council conclusion and the press’s take will set the tone on Monday,” Societe Generale analyst Kenneth Broux said. Greater optimism on the Brexit process after the European Union summit last week could send the pound higher, he added.

Wednesday’s July-September GDP growth figures are the last big piece of official data ahead of the BOE’s meeting next week and will hold steady from the prior period at a quarterly pace of 0.3 percent, according to a Bloomberg survey of economists. 

Economic Momentum

While “given the vulnerable economic momentum in the U.K., it might get a little bit more attention than usually,” the GDP data are unlikely to have an impact on rate-hike prospects, said Andreas Steno Larsen, a Copenhagen-based currency strategist at Nordea Bank AB.

A big move in the pound following the data is unlikely “unless it’s a disappointing number, in other words 0.2 percent or lower,” in which case the currency could fall below $1.30, Societe Generale’s Broux said.

While other major central banks are also in focus this week with a decision due on who will lead the Federal Reserve next and the European Central Bank’s meeting scheduled for Oct. 26, market expectations for a BOE rate increase remain high. The implied probability of a hike in November were at 79 percent on Friday, money-market prices show.

“There is basically no material data out before the next meeting,” said Larsen. “So only a major setback in the Brexit process can derail the hike.”

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