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Pound neutral against Euro & US Dollar

Market Analysis

GBPUSD, Daily

Cable has settled back under 1.30 after failing to sustain gains above here over the last week. A firmer dollar over the last several sessions has been a driver, although not so far today) In the bigger picture, the pound remains weak. The BoE’s effective exchange rate, which is it’s broader trade-weighted calculation of sterling’s value, was at 77.11 as of June 30, down over 9% from levels prevailing ahead of the Brexit vote in June last year, and off by over 19% on the average level seen since 1980. Cable, although well up from its post-Brexit vote lows, remains 12.5% below levels seen before the referendum on EU membership on June 23 last year. The weakness in the pound has driven up inflation, which leapt to a cycle high of 2.9% y/y in May data, up from the 0.3% y/y rate seen in the same month in the year before. This backdrop, along with less austere government fiscal plans, has BoE MPC members looking to at least reverse the 25bp rate cut of last August, which took the repo rate to a record low 0.25%. The UK outlook remains uncertain, however, not least how viable the minority government proves to be, and what consequences this may have on the Brexit process. There is Daily neutral view of Cable, as speculation for a BoE hike may, for the time being, offset any dollar-supporting influence of the Fed’s slow-go tightening cycle.

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Andria Pichidi

Market Analyst

HotForex

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