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Despite weaker economic fundamentals, analysts at CIBC expect the British pound  to appreciate into year-end on the back of domestic politics, and further next year, following anticipated progress in Brexit negotiations.

Key Quotes:  

“Looking into year-end, the UK is facing an election (December 12th) against a backdrop of increasingly downbeat fundamentals. While the economy narrowly avoided a recession in Q3, it still expanded by 0.3% q/q, with the annual rate retreating to its lowest in almost a decade, at 1.0% y/y.”

“Recent job data showed vacancies registering the largest annual decline since 2009, while the country’s total labour force declined by 58K in Q3 – the worst print in four years.”

“While waning macro fundamentals are partially a function of slowing global growth, Brexit remains the primary constituent of domestic uncertainty and the weakening economic backdrop. The UK has now passed its third Brexit deadline, and the outcome of the upcoming election will determine whether the market can expect at least some form of resolution, as Parliament is supportive of the recently revised and negotiated withdrawal agreement.”

“Despite weakening economic fundamentals, our base case scenario is for the Conservatives to gain a majority in the upcoming election, though it could be by a tight margin. Furthermore, given that we expect progress to be made on the Brexit process next year, that should see Sterling rally towards highs reached in May. However, given the imminent election, expect Sterling bulls to remain contained in the near-term.”