GBP: Brexit and external risks now main driver of the pound - MUFG

FXStreet (Delhi) – Lee Hardman, Currency Analyst at MUFG, suggests that the Pound weakness has accelerated early this year undermined primarily by negative external developments and the pricing in of a higher Brexit risk premium.

Key Quotes

“Recent heightened financial market instability has highlighted the pound’s vulnerability to the UK’s still elevated current account deficit of around 4% of GDP. The ongoing drop in the price of crude oil is also acting to push back expectation for BoE monetary tightening further into next year. If low oil prices are sustained, the expected pick up in headline inflation will be delayed until the second half of this year making it difficult to the BoE to justify raising rates while inflation is below 1.0%.

BoE Governor Carney is also scheduled to deliver a lecture at lunch time today. It appears likely that any comments on monetary policy will have a more dovish leaning given recent negative external developments. MPC member Vlieghe spoke yesterday and displayed a cautious outlook or monetary policy stating he is patient on interest rates. “In order to be confident enough of the medium-term inflation outlook to raise the bank rate, he wants to see evidence that growth is not slowing further, and that a broad range of indicators related to inflation are generally on an upward trajectory”. The main drivers for pound direction are likely to remain external and Brexit risks at least through the first half of this year keeping it on a weaker footing.”