GBP: Bullish technical signal reinforces upward momentum – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the pound has continued to strengthen during the Asian trading session despite further dovish comments yesterday from BoE policymakers.

Key Quotes

“The pound’s upward momentum has been reinforced after EUR/GBP closed below its’ 200-day moving average at around 0.8470 for the first time yesterday since late in 2015. It could provide an important bullish technical signal for the pound in the near-term, and supports our view that the pound will outperform more bearish expectations during the first half of this year and lower EUR/GBP closer to the 0.80000-level. Building political risks in Europe are providing support for the pound and are beginning to outweigh Brexit concerns at least in the near-term. We have never bought into the view that the triggering of Article 50 which is still likely next month should justify further pound weakness after it has already lost around a fifth of its value against the currencies of the UK’s main trading partners in recent years. We continue to believe that the bulk of the Brexit adjustment is already behind us with a lot of bad news and uncertainty already priced into the pound at current weak levels.”

“The current scale of undervaluation is resulting in the pound becoming less sensitive to negative developments such as further dovish comments from BoE policymakers. At yesterday’s Treasury Select Committee Governor Carney and MPC members Haldane, Vlieghe and McCafferty struck a dovish tone on balance by reiterating the message from the last Quarterly Inflation Report that they now believe there is more spare capacity in the labour market than previously assumed. It has allowed the BoE to justify maintaining the emergency easing implemented last summer despite the much stronger performance of the UK economy. The equilibrium unemployment rate was lowered by 0.5 point to 4.5%. The discussions revealed that there was a range of views over the updated estimate. Dovish MPC members Haldane and Vlieghe believe that it could be even lower while the hawkish McCafferty would have been more comfortable with having lowered it to 4.75%. The BoE will now closely watch wage growth to judge if there if their updated estimate is correct. Stronger wage growth and a further rise in inflation expectations would increase pressure on the BoE to begin reversing emergency easing.”

“The resilience of the UK economy following the Brexit vote was again evident in the latest public finances report. The government has borrowed GBP49.3 billion between April 2016 and January 2017 which is 22% less than at the same point in the previous fiscal year. On the current trajectory borrowing is on course to total around GBP56 billion for the whole fiscal year which would be well below the OBR’s projection from November of GBP68.2 billion. It will provide Chancellor Hammond with more leeway to ease fiscal policy in the future if required. However, we believe that he is unlikely to materially utilise that leeway in next month’s Budget. He has already refused to spend the GBP27 billion of “room for manoeuvre” built into his fiscal plans at the end of last year.”