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Pound Euro Edges Ahead as GBP Safe-Haven Appeal Wanes

The Pound Euro is struggling to overcome a sell-off as investors return to safer-havens, despite outstanding UK data.

Greatly above-forecast trade, industry and construction data was ‘a hat-trick of good news for the UK economy’, claimed IHS Global Insight Chief UK and European Economist Howard Archer. He also said it was a sign of ‘the economy firing on several cylinders at the end of 2016,’ rather than being ‘just reliant on services and consumer spending.

However, investors are have little to hold onto the Pound as political uncertainty surrounding other safer assets ebbs. This has left the looming spectre of Brexit to limit GBP gains.

This comes even as the latest data shows below-forecast trade deficits for the UK in December. The total trade balance shortfall narrowed to -£3.3 billion. Forecasts had been £200 million higher.

Production stats are also positive. Industrial production grew 4.3% year-on-year; over a point above the market consensus. Manufacturing production fared even better. Performance clocked in at 4%, smashing projections of 1.7% growth.

Meanwhile, construction output, pegged to contract -0.5%, instead grew 0.6%.

The data was so positive analysts have questioned whether the 2016 Q4 GDP estimate may have been too dovish. ‘The preliminary Q4 GDP data had made assumptions for how these would perform and those assumptions were far too pessimistic,’ Scotiabank Economist Alan Clarke said.

The punchline is that other things equal, this points to Q4 GDP being revised UP to 0.7% quarter-on-quarter.

The sell-off continued to keep GBP EUR gains below 0.2%, however. Uncertainty over the future of the Greek bailout has not overly accelerated the Pound’s advance.

Euclid Tsakalotos, Greek Finance Minister, flew to Brussels this morning in a last-ditch attempt to break the deadlock between creditors over his country’s bailout.

Investors viewed the move as a sign that some accord will be struck soon. A critical review of the current bailout has been held up by failure amongst all parties to agree on new budget targets.

Creditors want to agree a deal before Eurozone elections kick off. The amount of money leant to Greece has been a thorny issue politically for member states. The German government in particular doesn’t want the issue lurking when voters next to go the polls.

The inability on behalf of creditors to agree a budget surplus target has been a key stumbling block. Eurogroup officials claim Greece is on track to maintain a surplus equivalent to 3.5% of GDP. The International Monetary Fund (IMF) disagrees, stating debt relief is needed to allow for a target of 1.5%.

The IMF is not an active member in the current bailout. Yet officials have been desperate to keep the IMF on board so that the Fund can contribute to the fourth round of pay-outs in 2018.

However, European Commission Vice-President Valdis Dombrovskis has indicated the Fund may not be needed. He notes that the European Stability Mechanism (ESM) merely prefers – not mandates – the inclusion of other parties in rescue deals.

Cutting out the IMF would end the stalemate holding up talks. This prospect is allowing the Euro to slow Pound gains.

Sources claim Eurogroup officials intend to offer Greece a new deal that avoids the need to legislate further cuts. Greece’s Syriza government holds a thin majority in Parliament. The country’s politicians and populace are fiercely opposed to more harsh spending reforms.

Accordingly, the new offer is that fiscal cuts equal to 2% of GDP would be implemented automatically if – and only if – the country fails to meet the higher surplus target.

Eurogroup Head Jeroen Dijsselbloem was unmoving on the scale of the surplus required.

‘Greece must reach a budget surplus of 3.5 percent and there are discussions about what is needed extra,’ he stated.

Yet, with things still up in the air, GBP EUR exchange rates remain on the advance.