GBP/USD: Grim outlook set to undermine the pound – MUFG

The pound weakened against the US dollar in June. But the pound also weakened versus the euro. Economists at MUFG Bank highlight GBP’s downside risks. 

Picking a fight with the EU set to undermine confidence further

“The OECD forecast for growth in 2023 was put at zero percent. Consumer confidence hit another record low, retail sales over April and May were weaker than expected while real GDP contracted by 0.3% MoM in April, weaker than expected. Terrible current account data for Q1 is likely to undermine GBP sentiment further. It highlights the vulnerability of GBP to increased risk aversion that we expect over the coming months.” 

“Voting legislation through the House of Commons allowing the UK to unilaterally change the Northern Ireland Protocol may be well-timed politically (to deflect from Boris’ other troubles like a record swing against the Tories in a by-election) but will only add to the negative sentiment. Increased conflict with the EU will only raise uncertainty and undermine trade further.”

“The risks for GBP/USD over Q3 is to the downside given GBP tends to perform poorly as financial conditions tighten. Beyond then, even as GBP/USD recovers, GBP will remain weak versus EUR.”