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Pound investors shrug off economic strength in the UK as Brexit looms

Jason Alden | Bloomberg via Getty Images

U.K. currency traders appear to be increasingly dismissive of economic strength in the country with Brexit negotiations fast approaching.

Britain's services sector grew at its fastest pace in almost 18 months in December yet, unusually, the data published Thursday prompted little to no response from the pound.

Investors appeared to be placing more of an emphasis on political developments in the pipeline as opposed to economic developments.



Politics trumps economics

"To some degree, I believe this too. We have seen pretty strong economic data of late, for example upwardly revised GDP (gross domestic product) and 17-month highs for the services sector, so you probably would expect that to support sterling but it has had a pretty weak impact," Liz Martins, U.K. economist at HSBC, told CNBC in a phone interview on Friday.

Unquestionably the most significant domestic political risk for Britain is Brexit and traders are cautiously awaiting U.K. Prime Minister Theresa May to trigger divorce procedures for the country to leave the European Union (EU) in March 2017.

"Pound sterling is a good bellwether for Brexit and that's because it is more of a straight indicator that reflects sentiment," she added.

The value of the U.K.'s currency has fallen by around 17 percent since British citizens voted to leave the EU in June 2016 and sterling has continued to remain volatile to Brexit developments since the vote.

In spite of the Brexit referendum, the economy has surprised many with its resilient performance with Andrew Haldane, chief economist at the Bank of England, describing the financial market as "remarkably placid". The U.K.'s benchmark stock index, the FTSE 100, extended its record breaking steak for the sixth consecutive day on Thursday for the first time in two decades.

"The likelihood of messy politics at the start of the Brexit negotiations – likely mid-2017 – will keep the pound down versus the dollar and on a trade-weighted basis during 2017. Cable could easily end 2017 below 1.20," Kallum Pickering, senior U.K. economist at Berenberg, told CNBC in an email on Friday.

"Remember, markets hate uncertainty, and for now, Brexit remains a big black box both economically and politically – for the next couple of quarters at least, sterling will suffer as a result of that," he added.