Brexit and Weak Economic Data Weigh On the British Pound

Brexit and Weak Economic Data Weigh On the British Pound - British national flag coming through EU flag
Bill Cascade   NEW 04/07/2019 00:00:00 Forex

The UK construction sector hit the roughest patch since 2009 after a Markit Economics survey report showed the PMI for June to be a mere 43.1. This is against the 48.6 value registered in May. For starters, this is the fifth month in a row that the construction sector PMI is clocking below the 50-point mark.

Against the backdrop of the weak data, the Sterling Pound is facing stronger headwinds from sellers. The GBP is facing a high selling pressure against the US dollar, the Euro and a couple of other majors.

In early Tuesday morning trades, the GBP/USD pair pared 0.3% settling at $1.2610. The latest downward shift comes in the wake of another decline on Monday where the pair lost 0.6%. 

Apart from the construction PMI revelation, political risks from Brexit are adding pressure on the GBP. Until now, there is no definite date for Brexit and the Conservative Party is in the middle of selecting the person who will guide the country after Theresa May’s exit. 

Put together, the weak data and Brexit have forced the GBP/USD pair to hover around and finally deep below 2-week lows.

GBP/USD Forex Chart

Source

What does the future look like for the Pound?

The decline in the construction PMI is a major point for worry for any GBP bulls. Nonetheless, it seems the data is not so significant when the market is pricing in risk concerning the Pound. This is because a 0.3% decline in the pound-dollar exchange rate is simply a minor correction.

But investors should not celebrate yet. A report by UniCredit Bank, renowned optimists on GBP, signifies a future that will not be fair on the Pound. To be sure, the bank lowered its forecasts for the GBP, a move which should spook GBP bulls. 

Nonetheless, UniCredit is still of the view that the currency should recover before yearend. The faith in the GBP comes from the belief that the Brexit drama will conclude with a deal. Still, the revision of the forecasts casts a shadow on the bank’s confidence in the recovery of the currency by any substantial amount.

Euro fails to capitalize on the GBP woes

On the other hand, the Euro is mired in its problems. For starters, there is a looming crisis of leadership in the EU after a failure to reach an agreement on who should be the next EC President. Various other key seats in the EU will fall vacant before yearend, and that adds to the urgency to reach a consensus.

As such, this has substantially limited the appeal of the Euro. Another instance dampening the attractiveness of the common currency is the weak retail sales figures from Germany. This is the second month in a row that EU’s largest economy is reporting contracted growth in retail sales. 

Going forward, a decisive move in the GBP/EUR pair will depend on the next PMI data for the UK's services sector. Weak data will most certainly nudge the exchange rate to the lower levels.

 

 

 

 

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