Data & Brexit keeps BoE on tightening track

GBPJPY, H1 and Daily

UK September retail sales disappointed, contracting by 0.8% m/m after rising by 0.4% in August. The median forecast had been for a 0.4% m/m decline. The y/y figure rose 3.0% y/y, down from 3.4% y/y growth in the month prior, and below the median forecast for 3.6% y/y. A 1.5% m/m decline in food store sales, the biggest m/m drop in this category since October 2015, drove the headline m/m contraction. The data, while disappointing, has had minimal market impact.

This week’s data has seen perkier than expected August wage data offset by sub-forecast readings in CPI and Retail sales, which, along with the significant uncertainty on the Brexit front, should keep the BoE on hold with a view to tightening further down the track.  Tightening could support Sterling ahead of Brexit risks.

Meanwhile today, Sterling has continued to hold up, with portfolio and reserve managers remaining sanguine to the risk of a no-deal Brexit, although the risk of a cliff-edge departure seems more tangible after the EU-17 cancelled the special summit for Brexit that had been earmarked for mid November. The president of the European Commission Tusk called on the UK government to come up with creative solutions to solve what has increasingly seemed an insoluble Irish border problem. The EU left the door open to a special summit should progress be made, and offered the carrot of a longer transition period, although the major known unknown is whether Prime Minister May can reach a deal with the EU that would in turn find sufficient support at a House or Commons vote.

There remain 5 different possible scenarios: a no-deal Brexit, a Canada+ type of hard Brexit, a Chequers-plan Brexit, a Norway-model style soft Brexit, and a let’s-call-the-whole-thing-off option, whereby the UK decides on remaining in the EU (which could only happen after a new referendum or general election). May has continued to push an evolved version of her so-called Chequers plan, which looks to be a no-go for the EU (crossing red lines by demanding cherry-picked access to the single market), while the Canada+ option, like Chequers, would be dogged by finding a solution to the Irish border problem.

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Andria Pichidi

Market Analyst


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