GBP/USD: Weaker economy and risk of a Brexit hardliner PM to keep the pound on the back foot - Rabobank
|Analysts at Rabobank continue to see the Pound as vulnerable in the current environment both from economic weakness and also from the risk that the UK could soon have a hard-line Brexiteer in Downing Street.
Key Quotes:
“Extraordinary political machinations in the UK have meant that attention has been diverted away from UK economic data for a prolonged period. That said, the release of shockingly poor production numbers from April did weigh on the pound. The numbers are an uncomfortable reminder of the real impact of political uncertainty and an indication of the costs that can be associated with leaving the Brexit process unresolved three years on from the referendum. On paper the BoE is the currently the second most hawkish G10 central bank after the Norges Bank. The weakness of the April production data question whether the Bank would have the gall to hike rates in the post-Brexit environment even if there was a plunge in the value of the pound and an associated rise in inflation potential and inflation expectations. We continue to see GBP as vulnerable in the current environment both from economic weakness and also from the risk that the UK could soon have a hard-line Brexiteer in Downing Street.”
“GDP data are volatile, there is good reason to expect a slower pace of activity in Q2. According to the BoE the policy response to Brexit could go in either direction, with the impact of any currency move on inflation expectations likely a strong indicator for the MPC. If UK economic data remain soft, however, the Bank could struggle to persuade the market that a rate hike was a real option. This could become a conundrum for the MPC. For now the combination of a weaker economy and risk of a Brexit hardliner in 10 Downing Street should be sufficient to keep the pound on the back foot.”
“We see risk of cable dipped back towards the GBP/USD1.26 area on a 1 to 3 mth view.”
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