GBP: Post-Brexit devaluation plays its role - MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the stream of information suggesting the UK economy is proving far more resilient than expected continued yesterday with the modest upward revision to the Q4 real GDP data with the Q/Q rate revised from 0.6% to 0.7%.

Key Quotes

“A big part in that was the sharp revision higher in the net trade component. Exports gained 4.1% while imports fell 0.4% - this mix resulted in net trade adding 1.3ppt to overall real GDP growth, the largest contribution since Q1 2011.”

“We keep hearing about the big negative for the economy to come. Rising inflationary pressures will erode real incomes and weaken consumer spending. However, while that is a near certainty, the extent of the hit is not. It is worth noting that inflation expectations measured by the 5yr/5yr inflation swap rate are now falling and the most recent CPI data came in weaker than expected.”

“With the House of Lords now having passed the Brexit bill, the legislation goes to the “committee stage” where some alterations may still be made and divisions and some conflict are still possible over the “blank cheque” aspect of the deal with many MPs wanting the chance of a vote in time for changes to a deal with the EU to be made. Nonetheless, it is clear we are heading for the triggering of Article 50 by the end of March and with large speculative short positions still in place, we see increasing risks of an unwind given the triggering of Article 50 is very unlikely to have much market impact at this stage. We continue to see EUR/GBP dropping to the 0.8000 level over the coming months.”