GBP: Immune to bad news? - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, explains that measured since the start of this year the pound is the best performing G10 currency but these gains must be set against the sharp losses that GBP experienced in the wake of the UK’s referendum on EU membership last June. 

Key Quotes

“Measured from June 23 2016 the pound is still the worst performing G10 currency and is currently trading 12.5% lower vs. the USD and 6.8% down vs the EUR.  This year’s better performance can be closely associated with short-covering.”

“That said, given the risks that are associated with the forthcoming Brexit procedure we continue to view GBP as vulnerable on a medium-term basis and see scope for the pound to end the year on a softer footing vs. both the EUR and the USD.”

“Despite the warnings of many economists, the UK economy held up well in the aftermath of last year’s Brexit negotiations.  The UK was one of the faster growing G10 economies last year and employment levels remain very high.  This has contributed to the better tone of the pound this year.”

“Although the BoE have fired out a few warnings about the amount of inflation that it will be prepared to look through, in the face of shrinking real incomes we expect the BoE to hold steady on policy well into next year and potentially beyond.  By contrast better economic data in the Eurozone suggests that over the next few months it is likely that the debate over a potential reduction in ECB stimulus will evolve.  This is likely to lend support to the EUR.  We see risk of a move towards EUR/GBP 0.89 by the end of the year.”