GBP: Don’t worry be happy? – Rabobank

Jane Foley, Research Analyst at Rabobank, notes that in the aftermath of the UK’s referendum on EU membership business and consumer confidence data both fell hard.

Key Quotes

“At the press conference that followed last week’s BoE policy decision and Quarterly Inflation Report publication, MPC member Broadbent explained how consumer confidence measures contributed to the Bank’s forecasting models. Despite the Bank’s downward revisions to growth, three members of the MPC voted against last week’s consensus decision to step up purchases of government bonds. Their reticence was based on the view that recent surveys and confidence measures may be overstating the weakness of the economy. Forbes voiced additional concerns about excessive stimulus and the side-effects and risks associated with the programme. For these members, the strength of the overnight release of the July BRC retail sales survey provides some validation of these concerns.

According to the BRC survey retail spending in July rose 1.9% y/y, the biggest rise in 6 months. Some of the strength can be explained by the lacklustre 0.2% y/y gain the previous month and both sets of data are likely driven by the poor weather in June and the eventual appearance of summer in July.

Although the BRC results contrast with the very weak July performance noted in the CBI’s July retail survey, which showed sales volumes declining more rapidly than at any time since January 2012, the BRC results find support in yesterday’s release of consumer spending data from Visa.

Clearly it is far too early to come to any strong conclusion regarding the impact of the Brexit vote on the UK consumer or on the broader economy. However, the initial impact may not have been quite as severe as many had feared. We would not underestimate the impact of the reassurances and generous liquidity provision of the BoE in soothing the fears of markets and consumers alike in the days immediately after the referendum.

The expectation of further monetary policy stimulus and the follow through announced last week by the BoE will also have played a part in limiting the fallout from the referendum result. Even though the MPC minutes last week warned that further easing was on the cards, the Bank’s early action may reduce the need to follow through with more stimulus.

We continue to see the pound as vulnerable to further downside in the months ahead as the risks surrounding Brexit become more measurable and expectations of further easing remain in place. However, ahead of the BoE’s November Inflation Report we see sterling downside as likely to be contained by EUR/GBP 0.86, GBP/USD1.28.”