There's turbulence ahead for the pound as key UK data releases collide with Brexit and geopolitical noise
While markets are in the midst of summer holiday mode, the combination of key UK data releases, as well Brexit and geopolitical headlines, may present some near-term turbulence for GBP markets. On the data front, there are three key reports to note next week:
Reports in the media also suggest the UK government is set to release position papers on key Brexit issues in the next few weeks. Of particular economic interest will be the UK's proposals for replacing the customs union and achieving 'frictionless trade' with the EU. We could also receive clarity on the type of transitional deal the UK is willing to seek, notably the length of any transition period and willingness to replicate existing arrangements.
We expect the next round of key UK data releases to be the final nail in the coffin for a 2017 BoE rate hike. The implied probability of a 25bp hike by year-end has already fallen to less than 25% after the BoE's dovish disappointment. While higher inflation figures may keep lingering hopes alive, the slowing trend in consumer activity, as well as uncertainty over the degree of slack in the labour market, should keep the hawks at bay. Risks are that the front-end of the UK curve continues to flatten and that BoE rate hike expectations get pushed further out into 2018. This could weigh on GBP in the near-term.
On the Brexit front, we continue to believe it is too early for GBP markets to price in any Brexit transitional deal hopes; there are a number of “divorce” stumbling blocks that need to be overcome before any transitional arrangement is signed, sealed and delivered. Diminishing tail risks of a cliff-edge Brexit is certainly easing any major downside GBP pressure but the currency is far from out of the woods when it comes to political event risks. We earmark early October as a key test for GBP markets; both the governing Conservative Party Conference (1-4 Oct) and the final round of opening Brexit talks (Oct 9) will shed light on the stability of the UK political environment, as well as any progress being made when it comes to the UK's 'smooth' exit from the EU.
GBP sensitivity to UK data surprises based on ING's surprise model estimates