Analysis: British Referendum Drives Sentiment in the Pound

The upcoming referendum for Britain to leave the EU continues to outweigh the effects of economic data and keeps the pound within a relative range. Recent polls show a consistent lead for the 'stay' camp, which has helped support sterling, with cable up over 450 pips during April.

Data has seen deviations in both directions during April, with misses on employment figures but gains in inflation. Average Weekly Earnings for February missed estimates of 2.3% to come in at 1.8%. Unemployment remained at 5.1%, while Claimant Count Change for March also missed estimates showing a gain of 6,700 versus an expected reduction of -11,300.

Consumer Price Index for the month of March beat estimates across the board. Core CPI m/m printed at 0.6%, double the expected 0.3% and February's reading of 0.4%. Core CPI y/y printed at 1.5% above expectations of 1.3% and last month's reading of 1.2%. Headline CPI m/m printed at 0.4% above expectations 0.3% and last months 0.2%, whilst CPI y/y printed at 0.5% above the 0.4% expected and last months 0.3%. CPI m/m and core CPI y/y are at their highest levels since September 2014 and November 2014 respectively.

On April 14, the meeting minutes showed that MPC members unanimously agreed to keep rates unchanged at 0.5%, with the vote remaining as expected at 0-9.

The BoE's Monetary Policy Summary showed greater focus on the UK's EU referendum as the BoE stated that "referendum effects make forecasting direction of UK economy harder" and that the MPC is "likely to react more cautiously to data around the referendum", furthermore, "GDP may slow H1 2016 due to Brexit Brexit Brexit stands for British Exit, or in reference to the United Kingdom’s decision to formally leave the European Union (EU) as declared in a June 23, 2016 referendum. In a more immediate sense, a tight vote and unexpected result helped drive British pound (GBP) to lows that had not been seen in decades.The day following the referendum, former Prime Minister David Cameron resigned from office where he was replaced by Theresa May, who later resigned from office on June 7th, 2019. Active Prime Minis Brexit stands for British Exit, or in reference to the United Kingdom’s decision to formally leave the European Union (EU) as declared in a June 23, 2016 referendum. In a more immediate sense, a tight vote and unexpected result helped drive British pound (GBP) to lows that had not been seen in decades.The day following the referendum, former Prime Minister David Cameron resigned from office where he was replaced by Theresa May, who later resigned from office on June 7th, 2019. Active Prime Minis Read this Term uncertainty".

Despite increasing concerns and difficulties resulting from the UK's EU referendum, the general consensus amongst BoE members is that the next move for interest rates will be a hike, stating that "more likely than not rates will have to rise over forecast horizon".

The next major data point for GBP is first quarter Preliminary GDP. However, as we have seen with the recent prints on inflation and the labour market, reactions to economic data appear to have less impact as the Brexit issue drives sentiment for now.

As long as the BoE maintains its conviction to raise rates circa 2017, the pound will be fundamentally a long-term bullish currency however this will remain largely irrelevant until the June 23 referendum has passed, as polls drive short-term direction.