GBP: Searching for a positive catalyst – ING

Analysts at ING suggest that the pound is touching distance away from their long-held conviction call of 1.40 against the US dollar in 1Q18 – but even they're slightly surprised by the speed at which we have got there.

Key Quotes

“We do think there is more upside potential for GBP in 2018 – but for the next wave of appreciation to kick in, we'll require a positive GBP-specific catalyst. We continue to cite 2 non-mutually exclusive potential sources: (1) positive UK data surprises and (2) actual Brexit progress in the form of a 'gentlemen's agreement' over a transition deal. On the former, this week's UK jobs report (Wed) will give us some further clarity on wage inflation; any positive surprises here would give BoE hawks some confidence that underlying price pressures are moving in the right direction. The first release of 4Q UK GDP (Fri) is expected to show 0.4% QoQ growth - again BoE sentiment will be sensitive to any surprises here.”

“With markets barely pricing in one BoE rate hike in 2018 - and only 50bps of tightening in over a 2-year horizon - we still see the potential for a steeper UK rate curve to lift GBP higher. Timing this is key: in the absence of any supportive data, positive Brexit headlines will help to steepen the curve. This, however, seems like a February story - with PM May not expected to outline the UK's position on a future trade deal with the EU until the middle of next month.”