Tuesday, 4 October 2016

Pound remains low despite good economic data

Sterling has fallen further this morning, due to continued concerns over, you've guessed it, the EU referendum. At the conservative conference PM May has said that controlling immigration will be the key point in negotiations, meaning that remaining a member of the single market will be secondary to this. The Chancellor Philip Hammond has also stated that they will no longer aim to reduce the deficit to zero by 2020, instead stating that if necessary they will reduce austerity and borrow if needed, in order to stimulate the economy.

It's not all bad news..


Despite the fears and uncertainty surrounding 'Brexit' that has caused the Pound to weaken so much, the fact is that the underlying fundamental data coming from the UK shows that the economy is proving resilient. Yesterday Manufacturing data showed that activity grew at it's fastest pace in more than 2 years, and that growth in the 3rd quarter will be the strongest so far this year. This morning we saw Construction data was released, and was expected to show a contraction. The figure was much better than anticipated and actually showed growth, which has surprised many. The FTSE has also risen above 7000 for the first time in almost 18 months, however the weak Pound is a reason for this, because many international companies are listed, and those that convert their profits back to Pounds have seen a benefit and their share price rising.

It hasn't helped the Pound much though I'm afraid, as the general uncertainty keeps downward pressure on the Pound. The fact remains however that the sky hasn't fallen in, and the economy is proving resilient. Don't forget that the EU is facing serious difficulties and this is also likely to weaken the Euro. The current levels while much lower than earlier in the year, aren't all that bad when you look at the bigger picture. Cast your mind back to '08/'09 and we saw GBP/EUR nearly reach parity! I think that in the longer term, the UK economy will remain strong and outperform most EU economies, which should help rates recover. In the short to medium term though, while uncertainty remains, so will downward pressure on Sterling.

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