Global daily insight 4 november 2016

Daily Insight

Group Economics Macro & Financial Markets Research

04 November 2016

Brexit: A bump on the road Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com

Brexit: a bump on the road - The UK High Court decided that the UK government does not have the authority to trigger Article 50 without first holding a vote in Parliament. Triggering Article 50 will set in motion the 2-year process for the country to leave the EU and would be the starting point for negotiations about future relations between the UK and the rest of Europe. According to reports in the press, the UK government will appeal and the Supreme Court has set aside time between 5 and 8 December. In case the government loses the appeal, it seems likely that Parliament ultimately will approve the triggering of Article 50 and that the government remains on track to leave the EU. That said, it could delay the triggering of Article 50 until after the current deadline of the end of March 2017. (Aline Schuiling) FX view: Recovery in sterling - Since the start of this week, investor sentiment towards sterling was already improving. Initially sterling moved higher has the dollar fell as a result of uncertainty surrounding the US Presidential elections. Moreover, higher-than-expected service and composite PMIs also supported sterling. The decision of the UK High Court pushed GBP/USD above 1.24 and EUR/GBP towards 0.89. Moreover, the Bank of England left monetary policy unchanged as was widely expected. However, the move towards a neutral bias (dropping the earlier intention to cut rates) surprised currency markets.

Therefore, the recovery in sterling continued. In the near-term we expect the recovery in sterling to continue as speculators will likely close part of their short sterling positions. Our year-end forecast for GBP/USD and EUR/GBP are 1.25 and 0.88, respectively. We think the BoE will keep its policy rate on hold going forward. We estimate that the combination of the fall in sterling and the declining drag from energy prices will push up CPI inflation by around 2 percentage points. We think that hiking rates on the back of the fall in sterling, while the economy is weak, does not look likely at this stage. (Georgette Boele) US macro: Service activity expands at a slightly slower pace – The US services ISM fell to 54.8 in October from 57.1 the previous month. This represents continued growth in the non-manufacturing sector, albeit at a slower rate. Economic activity in the nonmanufacturing sector has been expanding for several years and it has been a main driver of the labour market strength. The details show that the forward looking components, including the new orders, fell to 57.7 from 60 the previous month. The employment index decreased to 53.1 from 57.2. We expect somewhat more moderate job gains in the coming time. Due to the decline in the service ISM, the composite PMI, which combines both manufacturing and services has dropped to 54.5 from 56.4. The composite index tends to track changes in GDP growth relatively well and at its current level, is consistent with growth of around 2.3% in the fourth quarter. This is broadly in line with our current forecast. (Maritza Cabezas)

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Daily Insight - Brexit: A bump on the road - 04 November 2016

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Daily Insight - Brexit: A bump on the road - 04 November 2016