(Bloomberg) -- Pound investors are increasingly ignoring signs of strength in the U.K. economy as political risk surrounding the nation's exit from the European Union dominates the currency's outlook.
The pound showed little reaction on Thursday immediately after a gauge of the country's services sector beat the median forecast of economists in December, rising at the fastest pace in more than a year. The initial muted reaction marked a contrast to data in the immediate aftermath of June's referendum, when smaller beats, or even reports that matched estimates, were enough to cause a bigger reaction.
With Prime Minister Theresa May's self-imposed March deadline for formally triggering the U.K.'s exit fast approaching, the better-than-expected performance of the economy has been overlooked, with bigger swings in the currency coming after relatively minor developments in the nation's path out the the trading bloc. The pound has fallen about 17 percent since the decision to quit the European Union, and dropped to $1.22 on Tuesday, the lowest since Oct. 31.
“Politics is trumping the data,” said Steven Barrow, London-based currency strategist at Standard Bank Group Ltd in London. “We tend to see the pound move more when Brexit issues arise and I suspect it will stay this way for some time. Many are skeptical of current economic strength.”
The U.K. currency climbed about 0.09 percent in the 30 minutes following Thursday's release, which showed Markit's Services index rose to 56.2 in December, well above the 54.7 forecast by economists. A smaller beat for the previous month saw sterling drop 0.1 percent in the same period, according to data compile by Bloomberg. Data released in September meanwhile, which showed a similar upside surprise, sparked a 0.18 percent climb, while the restating of a previous estimate in August pushed the pound 0.24 percent higher.
| Release date | "Surprise" Factor | Pound move 30 minutes after the release |
| Jan. 5, 2017 | +2.7 | +0.09% |
| Dec. 5, 2016 | +1.85 | -0.09% |
| Nov. 3, 2016 | +4.13 | +0.13% |
| Oct. 5, 2016 | +0.49 | -0.001% |
| Sept. 5, 2016 | +2.4 | +0.179% |
Diminishing returns from positive economic surprises will continue to be a factor as the Article 50 deadline approaches, according to James Athey, portfolio manager at Aberdeen Asset Management Plc.
While releases still give valuable information about underlying economic improvement “politics will play a larger role this year,” he said. “It is very difficult to invest based on politics which may lead to more volatility.”
To contact the reporter on this story: Chiara Albanese in Rome at calbanese10@bloomberg.net. To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, David Goodman
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