Brexit in a week from 10/2 - 17/2/2020

While concerns about coronavirus are rising, the British Pound strengthened quite significantly last week, bouncing off key support after good fundamental economic data has been reported and the UK balance of payments has reached a positive level for the first time since 1985.  There were also changes in Boris Johnson's government which were accepted positively by the markets. Will there be reasons to further strengthening of the British Pound? More details can be found in our article.
 

Fundamental analysis

Last week was very positive for the Pound. First, data on GDP were reported on Tuesday, which reached 1.1% on a year-on-year basis. In the previous period, the figure was 1.2%, which is a deterioration, but on a monthly basis, GDP improved significantly (the current figure is 0.3% compared to - 0.3% last month). Data on monthly production also improved.  Current level is 0.3% compared to previous -1.6%.

A big change occured in the trade balance. Great Britain's net exports exceeded net imports and the balance of payments is positive, reaching £ 0.85 billion. The surplus of export over import occured for the first time since 1985. A positive trade balance  is often a bullish signal and could lead to a strengthening of the Pound. This, however, provided that there is no threat of Brexit without a trade agreement, which cannot be ruled out at the moment.

Then came Thursday when there was a change in the Cabinet as Boris Johnson replaced several ministers. Surprisingly,  the Finance Minister Sajid Javid also resigned and  was replaced by his current deputy Rishi Sunak. The Pound  weakened at first, but then it began to strengthen rapidly. This is because, with the change of the Minister of Finance, the markets have sensed the possibility of bigger government stimulus to support economic growth.  The markets seemed to welcome this change, which was reflected in a rise in government bond yields and a strengthening of the Pound.

However, this governmental change needs to be accepted with some caution. What was the real reason for resignation of Javid is not clear. Was it because Sajid Javid, for example, did not agree to larger government spendings so that Britain was not over-indebted? If Boris Johnson needed a minister to approve a higher investment, but at the expense of a high debt increase, then it could weaken the Pound. It will be more evident in March when the British Cabinet  discusses the budget.