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Sterling’s compass shifts from Brexit to economy

The more sombre mood over the UK economic outlook is expected to keep sterling traders in a similar frame of mind for the remainder of the quarter, with analysts forecasting that any Brexit developments are unlikely to shift the currency from its narrow range.

GDP data on Thursday showed expansion of 0.3 per cent in the second quarter, matching economists’ expectations. A range of $1.28 to $1.31 for the currency has broadly prevailed since the middle of April, when UK prime minister Theresa May announced a snap general election.

The prospect of the Bank of England raising interest rate next week has faded, as economists argue that a drop in inflation in June, as well as the GDP data, are likely to tilt the balance towards the doves on the central bank’s Monetary Policy Committee.

Concern over the outlook for the economy is overriding Brexit developments that some strategists believe should be helpful for sterling. Some analysts have noted a shift among several government ministers in recent weeks towards favouring a transition deal with the EU to protect UK businesses, a scenario favoured by investors because it implies a pragmatic, softer Brexit.

Such a shift would ordinarily push sterling higher towards $1.40, said Derek Halpenny at Japanese bank MUFG. He pointed out that the BoE believed a transition deal would be helpful, “but over the short term there is a lot of pessimism in relation to the economy”.

Cabinet consensus on a transitional arrangement “is certainly good news for sterling”, added analysts at ING, but the absence so far of details were key, so the pound should in the meantime trade with a negative bias, they added. Besides, such an agreement with the EU would have to wait until there was a deal on the broad outlines of the divorce, including the exit bill.

Since this was unlikely until at least October, companies will be “sitting nervously waiting for news”, said ING. According to Jordan Rochester, a currency strategist at Nomura, the market believed the implications of Brexit was starting to be felt in the economy, which leaves investors more focused on watching incoming data.

A CBI survey on Tuesday reported the fastest rate in factory output since 1995, but the pound was unmoved. “Every piece of good news is ignored,” said Mr Rochester. “The market is more interested and excited by any data confirming its bias.”

Any potential break higher for sterling is unlikely until the Conservative party conference in early October and the European Council summit later that month that will review progress on Brexit talks.

Until then, “the market is not going to jump on transition noises”, he added.