Private DCN Private DCN - Sterling

Article 50 talk ensures a frosty start to the final quarter of 2016 for sterling

By Callum Holmes October 4th, 2016

Just like yesterday’s morning chill, the final quarter of the year started with a frosty reception for sterling. The UK currency appears to be on a slippery slope as the damp autumn leaves start to fall. The currency fell to a three-year low against the euro and the lowest level it has been against the US dollar since July.

The major catalyst was once again based around political news surrounding Brexit.  On Sunday, Prime Minister Theresa May said she would trigger Article 50, the clause needed to start the Brexit process, by the end of March 2017. Should this be the case it means the UK is likely to leave the EU by mid-2019. The news unsettled investors as the prospects of leaving the EU became more realistic.

Despite the soured sterling sentiment there was some positive news for the currency as UK manufacturing activity grew at the fastest pace in more than two years in September. The sector has been buoyed by a weakening sterling since the EU Referendum result.

The strong growth in UK manufacturing in the third quarter of 2016 further reduces the chance that the UK will fall into recession. This was measured in terms of the industry’s Purchasing Managers’ Index (PMI). However, what we should consider is that we have been here before, when George Osborne (then Chancellor of the Exchequer) suggested that we ‘get Britain making things again’ to try and capitalise on the weak currency.  While this manufacturing data is an encouraging bonus, much of the focus will dominate on services PMI figures on Wednesday.

In the meantime, construction PMI data is released today. Observers will be very keen to monitor the price action of sterling given the news from last weekend.