UK GDP data for August will hit the markets at 0830 GMT on Wednesday. Forecasts point to figures that are unlikely to spur too much volatility in sterling. Instead, the most crucial driver for the currency moving forward will be how the Brexit talks play out. With the EU seemingly ready to make some compromises at last, politics could well overshadow economics over the coming weeks, dominating moves in sterling.
The UK economy is forecast to have grown by 0.1% in August on a monthly basis, a slowdown after expanding by 0.3% in July. While this seems quite severe, it’s useful to note such a figure would still leave the yearly growth rate unchanged at 1.6%, which would suggest the economy remains on a solid track overall and that there’s little cause for concern.
In the absence of a major deviation from forecasts, Brexit developments may be far more important in driving the pound over the coming weeks, compared to economic data. Particularly so because markets currently don’t anticipate another rate hike by the Bank of England until August 2019 according to UK overnight index swaps, suggesting investors expect policymakers to remain sidelined until the Brexit fog lifts.
Now as for what has been happening on the Brexit front, hopes for a deal being wrapped up in the coming weeks are currently riding high. The latest media reports suggest the EU is set to offer the UK an unprecedented “super-charged” free trade agreement that wouldn’t go as far as propose “frictionless trade” as PM Theresa May has called for, but would still contain many of her own objectives. While there weren’t many specifics, an outline of this “offer” may be publicized as early as this week.
Bearing also in mind that speculative positioning on the pound is still heavily net-short according to the latest CFTC data, this implies the currency has lots of room to run higher in case a deal truly comes in sight and investors begin to unwind more of their prior short bets. Even in this case though, it’s not going to be a smooth trip higher for sterling, with price action likely to remain hostage to incoming headlines – and trading choppy overall – until a deal is sealed. In other words, the coming weeks will likely be marked by several ups and downs in the pound, before the currency assumes a clearer direction higher on a potential accord, or lower in the absence of one.
Technically, advances in sterling/dollar could encounter a first line of resistance around 1.3135, the high of October 7, where an upside break could open the way for the peak of September 26, at 1.3215. Even higher, the attention would increasingly turn to the zone near 1.3300, the September 20 top.
On the flipside, declines in the pair may meet initial support at the round figure of 1.3000. If the bears pierce below it then the next obstacle may be the 1.2920 area, this being the October 4 trough, ahead of the September 5 lows at 1.2785.
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