GBP struggles for clear direction – Lloyds Bank

Having reached a new year-to-date high against the US dollar, around 1.3650, the pound has retreated to the mid-point of its recent range, around 1.32, notes the research team at Lloyds Bank.

Key Quotes

“Pressure has been applied on the pair by the uncertain domestic political and economic outlook, with PM Theresa May’s leadership under question and Brexit negotiations stalling. Moreover, a more upbeat Federal Reserve, seemingly willing to tighten at a great pace than currently ‘priced’ by the market, has buoyed the US dollar. In light of this and recent strong US data outturns, we expect Yellen and co. to stay on the ‘dot plot’ implied course, by raising the Fed funds rate by 25bps in December and follow up with three further hikes next year.”

“In spite of these headwinds, GBP/USD has found some support from the evolving interest rate environment in the UK. The minutes from the Bank of England’s September Monetary Policy Committee (MPC) meeting and various speeches from key members, most importantly Governor Carney, were decidedly more ‘hawkish’ than previous communications. We anticipate the Bank raising the UK base rate for the first time in over a decade at its November meeting. In addition, President Trump’s seeming inability to drive through his desired tax cuts may weigh on the dollar.”

“Overall, we see the potential for some further GBP/USD weakness in the coming quarters, within the broader medium-term range. This is likely to be led by continued slow progress on Brexit negotiations and a widening in interest rate differentials in favour of the US. However, with opposing forces leaving the currency pair lacking clear direction, the range is likely to hold for the time being. We forecast GBP/USD at 1.27 for mid-2018, before the pair recovers towards 1.35 by mid-2019. Yet, the volatile nature of Brexit discussions means we are set for a prolonged period of uncertainty. This is reflected in the wide divergence in analysts’ forecasts, which range from 1.20 to 1.40 for the end of this year.”