Brexit optimism sends pound to 6 week high

Fiona Cincotta
By :  ,  Senior Market Analyst

Not only is the UK economy bouncing along at a stronger pace than forecast, but, according to EU Chief Negotiator Michel Barnier there is also real scope for a Brexit deal to be achieved in the next 6 -8 weeks. 

This was sufficiently exciting news to put pound bulls back in control after several weeks of flagging. The pound rallied over 120 points charging through $1.30 to its highest level in 6 weeks versus the dollar, whilst versus the euro it hit a 5 week high of €1.1240.

Operation save Theresa

The timing of the Brexit announcement is by no means a coincidence and comes just in time for PM Theresa May, who has been under immense pressure from hard line Brexiteers in her party. Given the political pressure Theresa May is under, Brussels is realising there is an increasingly strong chance the Prime Minister won’t make it to the finish line unless there is progress to report sooner rather than later. 

Reports that Barnier may have been too inflexible with his negotiating approach so far and Brussels possibly re-establishing Barnier’s negotiating guidelines are all offering hope for stability in Theresa May’s government and a better Brexit deal – both of which are pound positive.

UK GDP impresses

News that the UK economy grew at 0.3% month on month in July, ahead of the 0.2% forecast and well ahead of the 0.1% growth in June. 

This, on the heels of stronger than forecast service sector data last week, bringing encouraging signs for the BoE before they meet to give the rate decision on Thursday. 

On the data front it was not all good news, with industrial production and manufacturing coming in below expectations, as global demand waned amid escalating international trade tensions. Following a rate rise from the BoE just last month, the central bank are not expected to take any action this month. 

However, a solid monthly GDP figure, plus evidence of the dominant service sector remaining resilient and now suggestions that a Brexit deal could be done within a matter of weeks could encourage a few more hawkish sounds from the BoE nest.

FTSE sinks on stronger pound

The stronger pound inevitably sent the FTSE southwards, lagging behind its European peers as it moves towards the close 0.1% lower. With over 70% of constituents on the UK index being multinational companies, which earn abroad, a stronger pound is not beneficial for their profits.

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