GBP/USD: Increased risks of renewed UK GDP downturn limit Brexit impact – MUFG

Economists at MUFG Bank are becoming increasingly confident that the lift the pound would derive from a Brexit deal being confirmed is likely to be modest. Monday was a good example of some good news failing to provide much lift at all for GBP as the cable closed at 1.3024.

Key quotes

“The decision of Michel Barnier to remain in negotiations in London through tomorrow was viewed as a positive sign by the UK government yet it failed to register in the FX markets. The offsetting macro-economic news is such that investors remain wary of buying the pound as risks of a renewed downturn after the Q3 rebound increase.” 

“IMM data indicate that the market is currently modestly long GBP which no doubt reflects in part expectations of a deal being done. This remains the strong consensus in the market yet the upside for GBP has been limited.”

Increased restrictions and high frequency data from the UK continue to show risks of a renewed downturn in GDP growth in Q4. Increased QE by the BoE at its next meeting on 5 November is now highly likely but it will be the minutes that will be key for the pound in gauging whether appetite amongst the MPC for negative rates next year is increasing.” 

“The risk of negative rates is growing and that for a currency like the pound is significant. We have no example of negative rates in a country running a current account deficit, a budget deficit that is larger than most other major advanced economies and where inflation is by no means low. It certainly points to potential for a greater currency impact than in countries like Japan, Switzerland or the eurozone.”