ANZ thinks GBP/USD stability to be short-lived

"The UK November services PMI rose to its highest level since January (55.2 vs 54.5 in October), indicating that growth continues to hold up well so far in Q4. Services account for nearly 80% of UK GDP, so that bodes well for spending and employment growth as 2017 unfolds. The economic reality (at least as far as coincident data is concerned) is that the economy has received a significant monetary stimulus via the exchange rate and additional BoE easing measures.

Given that Article 50 hasn't been triggered and the UK remains a full member of the EU, it is business as usual for now and the economy is performing well. Sterling's recent stabilisation in part reflects that, as well as some possible signs that the government is maintaining a pragmatic approach to Brexit rather than hurtling down the hard Brexit route.

Brexit minister David Davis indicated recently the government could consider making some payments to the EU in return for access to the single market. That struck a different tone from the hard Brexit ethos evident at the October Tory Party conference. Meanwhile, the market awaits the Supreme Court's decision in early January on whether the government needs to consult with Parliament before triggering Article 50. That could delay an announcement beyond March 2017. Once Article 50 is triggered, uncertainty is likely to rise and financing the BoP deficit remains a major issue. Investment spending and inward FDI may fall whilst rising inflation will eat into real incomes. Against that backdrop, GBP's decline is likely to resume.

ANZ targets GBP/USD at 1.22 by the end of Q1 2017".

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