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GBP Market Overview Pre-Brexit

Fundamental Outlook (April)

Behind Brexit there has been some major early signals of economic disruption building up to the exit of the EU. Prime Minister May has taken an unorthodox approach and started to reach out to opposing party leader Jeremy Corbyn in an attempt to break the current Brexit deadlock. On top of this there was a Parliament vote to stop the UK from leaving the EU without a deal and extending Article 50 until the end of June to help sort things out.

What is likely to happen in the upcoming EU summit is a rejection of the extension of Article 50 and instead offer a one-year flexible extension. If we take a look at the underlying data we may seem some signs of economic health is being shadowed by the Brexit fiesta.

LogicStrategy Fundamental Quant Scores

Taking a look at the past week of LogicStrategy quant scores we can see some erratic volatility. On the 30th of March we saw GBP have a negative score of -7 showing a slight weakness, however over 3 days it managed to pick up over 12 points. This showed a promising strength signal for the Pound but as the data for Q2 was released GBP took another negative hit dropping all the way back down to -7.

Overall, in the past several days we can see how GBP has slowed down heading to Q2. Below I'll be running over some preliminary data released this month and what to look out for in the upcoming weeks.

Manufacturing PMI

One of the major pieces of economic data released this month was the Manufacturing PMI. The data is important because purchasing managers usually have early access to data about their company’s performance, which can be a leading indicator of overall economic performance.

The data was forecast to be 51.2 a decrease in the PMI however actual results were quite the contrary. Smashing forecasts by just under 4 points the PMI was released at 55.1. Showing healthy signs in the Manufacturing industry which could help bump the GBP higher in the future.

Construction PMI

If you've read our previous fundamental overviews, you probably know that the construction PMI is a strong leading indicator to economic growth. Generally, a reading above 50 indicates expansion in the construction industry; a reading below indicates contraction. It gives an indication about the health of the construction section in the UK. Not only do the results have an impact on construction but it also shows leading signs in area such as future employment, lending and exports/imports.

The was just under forecast by 0.1 however, as we can see although it's under forecast it grew by 0.2 points, edging closer to the 50 mark. Although it wasn't as forecast it can still be seen as a slightly strengthening indicator for GBP.

British Retail Consortium & Services PMI

Similar to the Manufacturing PMI the Services PMI is a great indicator for future growth in the economy. The BRC Shop Price Index is a price index of retail goods from participating stores which can be a good sign of future inflation and thus interest rate changes.

The data showed some interest signs, the major decrease in the Services PMI is a shock to economists. Expecting a soft decrease of 0.3, it actually fell just over 2 points below the 50 mark. The uncertainty from Brexit could be a key player on why construction and services are starting to slowdown, especially considering financial firms are cutting jobs. On the flip side a growing price index since last year shows a nice neutral sign for inflation.

U.K. Housing Equity Withdrawal QoQ

Housing equity withdrawal (HEW) is new borrowing secured on dwellings that is not invested in the housing market. Here are some main factors that affect HEW. Rising house prices encourage people to borrow against the increased value of their homes. Low interest rates. Making it cheaper to remortgage their homes. Confidence in economy. If people are optimistic then they will remortgage to spend on luxury items. If people are pessimistic, they would rather pay off debts and not take out loans.

The recent statistics show an increase in HEW when it was actually forecast to fall. This is an interesting statistic and one of the main drivers could be due to rising house prices and low interest rates. Due to the uncertainty of Brexit confidence in the economy is likely not a factor. Future housing statistics this month could suggest increases in prices and thus demand for the GBP.

Halifax Housing Statistics

The Halifax House Price Index measures the change in the price of homes and properties financed by Halifax Bank Of Scotland (HBOS), one of the U.K.'s largest mortgage lenders. It is a leading indicator of health in the housing sector.

The results from the data is showing promising is showing interesting signals. Although the stats are highlighted in green if we read between the lines the house prices have actually been falling. A recent growth of 6% has now been met with a -1.6% decrease showing slowing signs in the housing market, on top of this from last year it also dropped 0.2%. Could this also be linked to the slow construction growth, possibly.

In the end although the data is highlighted green it's actually worse off for the UK, growing house prices help with remortgaging and thus money being spent in the economy. While housing prices fall people are less likely to remortgage their homes.

What to look out for this month?

10th of April is a big date for the UK, multiple releases which can heavily affect the Pound are released this date. One of the bigger ones being the GDP release and Manufacturing Production. If the figures continue the negative outlook we may see the Pound weaken even more, if the results surprise us then we could see a new bull run for the Pound.

Sentiment Outlook

The Brexit volatility has either been friend or foe for various market participants. The hedge fund industry itself has been under fire for insider information on the subject by collecting private poll data on the outcome. In this section we'll go over the various positions participants have taken in the markets and which direction they're thinking GBP will go.

As we can see from the data Hedge funds have been primarily short of the GBP since mid 2018 while commercial positions have been at an extreme for some time in this period. Only until December 2018 was their a reversal in the pound breaking its downtrend.

Currently, it's in a very difficult and awkward position for sentiment analysis. Hedge funds have just crossed the 0 mark suggesting a long bias for hedge funds is growing despite Brexit complications.

Commercial positions are also creeping to extreme points in the long direction. Could this be a market bottom for GBP in favour a long term bull trend? Possibly, more to come on Sentiment data in the coming weeks.

Price Action Outlook

Currently, the GBP index has shown interesting signs towards the downside after reaching 133.0. Previously in October 2018 from this point the GBP weakened heavily all the way down to 125 and it has since done the same. Weakened down to the 130 mark where it has reached a level of support. Will it hold?

According to recent fundamentals there's been some mixed outcomes but overall it has been negative. On top of this the LogicStragey quant scores have shown a big negative shift in the Pound which could possibly continue. If so, we're likely to see this support break and price to continue down towards the 128.0 level. However, if the LogicStrategy Quant scores turn positive during this time we could see the support level hold out with further signals from a technical approach.

Since the COT data is best used on a weekly to daily time frame, we could see positions start to fill up as the price becomes discounted. If price continues to hover 130 and hedge funds continue to increase their long bias we may see the upwards trend continue for GBP.

This could make sense considering everyone wanting to short the GBP amidst Brexit, the 1 year cushion from the EU if accepted could help stabilize the GBP and reach an agreement which could help boost confidence in the economy and thus demand for it's currency.

Overall Bias: Slightly Weak GBP

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