US and UK trade deal offers no reason to change bullish view on Pound
GBP: The striking of a UK-US trade deal should be positive news for the pound and British stocks, yet so far we’ve seen little signs of euphoria in UK financial markets, which perhaps tells you all you need to know about how investors are viewing the deal. Either way, the agreement is unlikely to have any real implications for the UK economy, which has very limited dependence on goods exports or trade with the US. Let’s not forget that this is also far from a full-blown trade agreement, which will likely take months, if not years, to be finalised, and it will still be some time before the finer details are ironed out. Even if the deal on balance is not overly favourable for Britain, we see no reason to change our bullish view on GBP.
Thursday’s Bank of England announcement was hawkish. The vote on rates was deeply split, with MPC members appearing divided over how best to tackle the risks posed by the tariffs. In an attempt to counteract the growth risks posed by the trade restrictions, and in acknowledgement of the progress made on disinflation, five of the nine MPC members voted for a 25bp cut, with two of the doves (Dhingra and Taylor) favouring a 50bp move. Yet, two members voted in favour of no change, while the remarks again stressed that further cuts would be both “gradual and careful”. With risks to inflation still elevated, and the UK isolated from the growth risks posed by US protectionism, we think that this cautious approach to easing will continue for a little while yet, which should help to keep sterling well bid.
Author
Matthew Ryan, CFA
Ebury
Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.
