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Tuesday’s speech from Theresa May laid out a very clear outlook for the UK’s stance in relation to Brexit negotiations, choosing to favour a hard Brexit. The fear of a hard Brexit has been one of the core drivers of sterling weakness over recent months, with traders highly sensitive to any comments from high level UK and EU politicians. However, Tuesday’s speech threw everything into the open, clarifying the government’s position and negating the harmful conjecture of late.
The result came as a surprise, with the pound rising sharply despite the apparently negative news. Was this a sell the rumour, buy the fact moment? Was it down to the announcement of an eventual vote in parliament, which some feel could scupper the process? Or was it the sheer relief that we can finally lay to rest the fears that have plagued the pound for months?
From an economic perspective, there is certainly good reason to believe we are overdue a rebound, with the UK economy faring well. Falling unemployment, resilient GDP growth and a strong services PMI trend point towards an economy which is faring well despite the fear of the future. The chart below highlights that typically we see the services PMI and GBP/USD move together, with a period of strength for the services sector typically denoting a strong economy, thus releasing the pressure on the Bank of England (BoE) to ease further. However, we have recently seen that relationship come into question, with the pound deteriorating despite a strengthening services sector. Could this mean we will see the relationship come back into play, with either a deterioration in UK data, or else a recovery for the pound?
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