FxWirePro: What does UK BoP imply for sterling in conjunction with post-brexit scenario?

No doubt, the spotlight for investors in euro area and in the UK is progressively more on the post-Brexit destination for the economy, not so much the starting point for this journey, hence GBP has decoupled from the data flow even though this now suggests the economy could grow at an annualized 1.75% rate in H2 and 1% in H1’17.

GBP has taken little consolation either from the declining likelihood of additional monetary easing, nor the chatter from the Conservative Party conference that the government intends to pursue looser fiscal policy.

The dominant driving forces of GBP are the concerns that a harder Brexit would do more damage than investors had hoped to longer-term growth and thereby aggravate the UK’s balance of payments challenges.

The UK balance of payments problem has two dimensions:

1) The UK needs to fund a record 6% of GDP current account deficit at a time of record low-interest rate spreads and invasive economic uncertainty.

2) The UK has gross foreign liabilities of over 400% of GDP which creates a serious risk of capital repatriation should investors lose confidence in the UK (central banks own 12-21% of UK GDP in GBP reserves).

Drivers of bearish GBP:

1) Outright capital repatriation from slower moving long-term investors including the central banks.

2) The government confirms it is intending to prioritize migration control in Brexit negotiations.

3) Business investment contracts in response to fears of a hard Brexit

Drivers of bullish GBP:

1) The autumn statement signals outright fiscal expansion (current plans assume 0.8 ppt of fiscal drag).

2) If the BoE removes its easing stances in November

3) If the government does a volte face on a hard Brexit.