Weakening UK economic backdrop is likely to increase GBP’s vulnerability in coming months - Rabobank

Jane Foley, the senior FX strategist at Rabobank, notes that GBP/USD pair is trading close to its lowest levels for the year as the pound is clearly vulnerable against a backdrop of political uncertainty and a deteriorating UK economic environment. 

“Towards the end of the month the results of the Tory Party leadership election should bring further clues as to the risks of a no deal Brexit.  We see risk that GBP/USD will dip to the 1.23 area on a 3 month view on the back of fears of a no deal Brexit.  Our assumption of a recovery to the 1.30 area in 6 months assumes that Brexit will be delayed into next year.

Politics is set to remain the main driver for the pound in the coming months. That said, the weakening UK economic backdrop is likely to increase GBP’s vulnerability.  Last week’s releases of disappointing PMI data for June highlighted the downward pressures on the UK economy.  Having been lifted by stockpiling in UK ahead of the original March Brexit date, there is growing evidence that economic activity is slowing as these are pared back.  The results of a Bloomberg survey provides a consensus forecasts for a modest -0.1% q/q contraction in UK GDP in Q2 and a steady BoE policy rate until 2021.

Although the BoE’s official guidance suggests that rates could go either way dependent on Brexit, BoE Governor Carney has appeared to soften his policy stance recently against the backdrop of trade wars and slowing global growth. Tomorrow’s releases of May monthly GDP in addition to production and trade data should help clarify the relative strength of the UK economy.

On the charts a break through the December low close to GBP/USD1.2478 would target the 1.2351 area which is the April 2017 low.”