GBP shorts are recommended as the UK economy shows increasing signs of losing growth momentum as households adjust spending to their weaker balance sheets, investment stays weak due to Brexit related uncertainties and real rates stay one of the lowest within the G10 with 10-year inflation adjusted returns at minus 1.799%. GBPUSD may see a marginal new cycle high but levels near 1.33remain a sell.
This morning GBP markets wake up to a set of mixed news. GBP positive is that, according to the Telegraph, the government may be willing to pay an exit fee of EUR40bln. However, this is not entirely new news as the UK government turned towards a more constructive Brexit negotiation approach under the leadership of Chancellor Hammond indicating that it is willing to honour its obligations, hoping that it can negotiate a multi-year transition when leaving the EU. This allowed markets to re-price prospects of a March 2019 cliff edge, pushing GBP temporarily higher. The more constructive UK negotiation approach is in the price. Moreover, Brexit MPs have accused Brexit negotiators of using the summer quiet period to press through the ‘Brexit bill’ which could become the early start of fresh Tory rebellion (Telegraph).
Credit card transaction data suggest a sharp slowdown in UK consumer spending as households try to consolidate their currently high level of non-secured debt. Weaker household spending may allow the BoE to look through the CPI reaching 3% in October, suggesting the window for the BoE taking out last August’s ‘insurance’ rate cut is closing rapidly. Former chancellor Lord Darling has warned in the Sunday Times that “small rate rise could kill spending”, after a “decade of rock-bottom interest rates has left consumers vulnerable to a ‘shock’ from even a marginal increase in borrowing costs” … “with knock-on effects for the broader economy”. The best outcome for the UK is its main trading partners maintaining its high economic growth rates providing net trade support. Within this scenario the UK should find enough willing investors to fund its twin deficits. A more difficult scenario would spring into place should global growth slow down and reduce cross border funding flows. In this case, the UK’s credit risk would have to adjust upwardly pushing its real rates up not because of economic growth, but to attract sufficient international capital to fund its current account deficit.
A dose of additional uncertainty has been injected by comments by Nick Timothy, the ex-adviser to PM May, suggesting that the position of PM May concerning Brexit has not changed. In September, PM May will have to clarify her official position concerning the subject. Currently, markets hope Chancellor Hammond represents the government’s (now moderated) position. Should May’s September speech (date not announced) move the clocks back to what investors would interpret as a hard Brexit then GBP would weaken significantly.
The Goldilocks scenario is staying with us as China surprises by its growth resilience. Since June, steel rebar has increased by 45% due to China-related demand dragging other industrial metal prices higher too. China’s July trade date will be released tomorrow and is likely to show a strong performance. Even oil, dealing with oversupply and inventories, has broken above significant chart levels. Today and tomorrow an OPEC/Non-OPEC meeting will be commencing in Abu Dhabi. US corporate earnings surprises plus July labour market data showing strong activity and only moderately better wage data should push financial conditions further up from here. China agreeing to sanctions against North Korea by supporting a related UN resolution is a positive.