While this week’s BoE meeting will maintain the status quo, it is unlikely to discourage further GBP inflows. As recent UK GDP and inflation updates have confirmed that the economy continues to improve. True, growth is still unbalanced and headline inflation remains weak, but overall the uneven recovery continues. This economic story may not seem exciting, but it is sufficiently compelling to support GBP in the current uncertain environment. Indeed this comparison argues that GBP can continue to outperform under the ‘unlikely safe haven’ moniker.
Further ahead, as the UK general elections near GBP will need something extra to maintain foreign inflows. That ‘extra’ will need to be either stronger, more balanced growth or alternatively a more decisive swing in the polls away from a possible (grand) coalition outcome. For now at least the GBP message remains unchanged and thus we remain short EUR/GBP.
A softer KOF leading indicator should help maintain the slow CHF grind lower seen since the currency stabilised after SNB’s removal of the EUR/CHF 1.20 floor. Similarly, we expect official reserves statistics Friday to show little further EUR/CHF defence has been necessary in recent weeks. This was the message in the SNB statistics bulletin showing a more dramatic drop in foreign exchange purchases (from CHF32.5bn in December to a mere CHF3.3bn in January).
Indeed this data seems difficult to understand given the supposed intervention activity seen in the market in the first few weeks of January before the floor was removed. In any case, if proven such data are correct, CHF safe haven pressure was not as significant as initial speculation suggests and therefore fewer obstacles exist to further currency weakness.
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