GBP/USD: Short/shorter? - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, notes that over the past 5 days GBP has been the best performing G10 currency and following up behind the NZD, the USD has been the third best performer. 

Key Quotes

“This improved tone of both the greenback and the pound in recent days is counter to the prolonged period of underperformance registered in both currencies.   The USD remains the worst performing G10 currency in the year to date but, measured since the UK’s EU membership referendum last June, the pound is still over 11% weaker against the USD and more than 17% down vs. the EUR.   The factors that have pressured both the USD and GBP in recent months largely remain in place.  That said, the build-up of short positions in both currencies suggest that they could now react differently to headline news.”

“Not only has the market lost confidence that the Fed will hike rates three times this year, but President Trump has spent much of this year fire-fighting political scandals and little has been done to further his programme of reform.  However, how the USD processes disappointment will be different now that so much negative news is priced in.   The greenback may start to show more sensitivity to good news than to back.  Headlines this morning reporting that Trump had dinner with two Congressional Democrats was taken as a positive step towards the eventual goal of tax reform.  This is despite an apparent lack of common ground between the comments from Trump and Treasury Secretary Mnuchin on reform yesterday.”

“Senior Republican Party members are also trying to head off complaints about a lack of a plan on tax reform.  Republican Congressional Leader Ryan yesterday declared that a template on Tax reform would be outlined in the final week in September. Consistent with the sceptical attitudes in market pricing regarding the likelihood of tax reform, a survey published early this week by BDO (a leading US accountancy and advisory organisation), indicted that just 22% of public company board members are anticipating that the Administration will be successful in its aim at pushing through tax reform in 2017.”

“There is little doubt that if Trump pulls a comprehensive package of reform out of the bag this year that the greenback stands to rise, particularly if there is a resolution concerns the repatriation of overseas earnings by US firms.  That said, a lot of ground needs to be covered to convince the market of this likelihood.  While we expect a period of consolidation in EUR/USD over the coming week, we see risk of further USD slippage in the first half of 2018.  That said, we see scope for the USD to strengthen modestly vs, the GBP in the coming weeks, though this will depend heavily on the market’s interpretation of BoE policy risks.”

“This week the pound has been supported by position adjustment and a steepening of the money market curve ahead of today’s BoE policy meeting.  This has been fuelled in part by the release of stronger than expected UK August CPI inflation which rose to 2.9% y/y.”  

“In August, confirmation that just two members of the MPC voted in favour of an immediate rate hike resulted in a softer tone for sterling. The previous meeting had brought three hawkish votes before Forbes’ term came to an end in June.  However, the fall in the number of dissenters last month belied the hawkish takeaways that were contained within minutes of the policy meeting.   If a third member votes expresses a preference for an immediate rate hike today, sterling is likely to be bolstered.”

“From a technical perspective, a break above the GBP/USD1.3270 area would put the 1.34/1.35 region in view.  That said, we do expect the consensus at the MPC to be in favour of a rate rise before next August at the earliest given the drag on real incomes from inflation.  Therefore, we would expect any positive impact on GBP from a hawkish MPC today to fade.  In addition, political uncertainty related to Brexit still promises that GBP is in for a rocky ride.   In our view the outlook for either the pound or the USD is unlikely to improve significantly in the coming months vs. the EUR.  We expect cable to hold close to the 1.30 area medium-term.”