• Joel

GBP might be in for a reality check next week

GBP might be in for a reality check next week

GBP has had a GOOD week. At the start of the week, GBPUSD was trading just above the 1.2800 level. At the end of the week, the cross has shot to north of 1.3150, a stunning more than 350 pip rally.

The move has been predominantly driven by USD weakness; USD bears have had plenty of reason to growl this week amid a very dovish sounding FOMC meeting, US political stalemate regarding further (and much needed) fiscal stimulus and continued climb in the daily US Covid-19 death rate, as well as US President Trump introducing an element of political instability into the equation by suggesting that the election ought to be delayed.

While that explain much of GBPUSD’s move to the north, what it does not explain is why GBP has outperformed its peers such as EUR.

There has been very little positive news flow on the UK domestic front; Brexit talks are still stalled and tensions are clearly still worsening with China. Meanwhile, second wave fears in the EU (and UK) are picking up. But GBP hasn’t cared about any of this, and continued its march higher at an impressive pace throughout the week.

This rally has dumfounded many analysts (including myself!). Many now think a reckoning is possible in GBP in the coming weeks, or, at the very least (if USD continues its march south) a period of comparative underperformance as we had seen for most of the last few months.

One catalyst for such a decline (or period of comparative underperformance) could be next week’s Bank of England Rate Decision and accompanying Monetary Policy Report (MPR).

The bank releases the results of its meeting at 0700BST/0200EDT on Thursday (much to the annoyance of tired Brits who preferred it when the rate decision was released at midday UK time).

No big changes to policy are expected, with QE parameters to be left unchanged, as well as interest rates to be left at 0.1%. But the tone of the statement and accompanying Governor Bailey press conference could be dovish, and the forecasts in the MPR could be downbeat – this would be GBP negative.

Credit Agricole say that “in our view, the BoE will have to remain ready to add further stimulus as needed, especially with Brexit-related uncertainty remaining high. After all, officials have so far failed to make sufficient progress to reach a deal on trade with the EU. Deliberations about the benefits of negative policy rates at next week’s monetary policy meeting could also prove a drag to the currency. In fact, rates markets are pricing in negative rates by the end of the year.”

The bank expects this pessimism be reflected in “more muted fundamentals as confirmed by labour, retail sales and inflation data in the week after”. “Caution on the GBP is warranted in our view” they conclude. 



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