GBP: Solid UK data and Brexit agreements hold the key to further significant upside - ING

Viraj Patel, Foreign Exchange Strategist at ING, suggests that they wouldn't be surprised if investors were genuinely confused over the short-term direction of travel for GBP given the myriad of different narratives and factors driving the currency right now.

Key Quotes

“Today's eventful UK calendar is only set to ramp up the short-term noise levels. The latest jobs report (0930 GMT) will be closely watched following the BoE's data and Brexit-contingent hawkish signal; solid jobs growth (ING: 185k) and nascent signs of pipeline cost pressures – with headline wage growth staying firm at 2.5% YoY – will be the minimum required to keep markets 50:50 over a May BoE rate hike.”

“A positive surprise in the wage data would see odds of a near-term rate hike trickle higher – although we note that despite the increased sensitivity of short-term UK rates to data surprises, to some degree there still remains a ‘Brexit factor’ in markets that may inhibit a normal reaction to any positive data (which is not surprising given that long-run Brexit dynamics still trump short-run data in terms of implications for UK asset prices). This is where the BoE may feel the need to interject and thus we would expect Governor Carney and his colleagues to reiterate their hawkish stance when they testify to Parliament later today (1415 GMT) – which should, ceteris paribus, keep the implied markets odds for a May BoE rate hike just where they are (55-60%).”

“Yet yesterday’s positive market reaction to news that the EU are willing to take a more ‘flexible’ approach to trade talks shows the potential for deferred GBP upside in the event of a constructive outcome at the 22-23 March EU leaders summit. There are now two types of Brexit agreements that hold the key to further GBP gains: a transition agreement and an association agreement (which is the EU offering the UK a ‘privileged’ post-Brexit relationship). In theory, this is good news – but GBP will need to see pen to paper on these ‘agreements’ before moving significantly higher. Our GBP/USD target for 1Q18 remain 1.45 for now, while we look for EUR/GBP to move down towards 0.86-0.87.”