GBP/USD: Weak or weaker? - Rabobank

News that 2 rather than 3 members of the BoE’s MPC had voted for an immediate hike in interest rates sparked an aggressive drop in the value of cable as it has been in an uptrend since June and, failing a break below trend-line support in the 1.3110/20 area, technical indicators remain supportive, points out Jane Foley, Senior FX Strategist at Rabobank.  

Key Quotes

“The uptrend drawn over the past couple of months is in part a reaction to the news that that a BoE interest rate hike is now on the horizon.  Although the BoE’s May Inflation Report contained some hawkish takeaways, the market chose to ignore these until 3 members of the MPC voted in favour of an immediate rate hike in June.  Even though the Bank revised its 2017 UK GDP forecast lower and confirmed its expectation that UK CPI inflation is nearing its peak, there was an underlying hawkish message contained in the Bank’s commentary that should limit downside potential for cable.”  

“Even though latest drop in the value of GBP reflects relief that the MPC remains some way from deciding to hike rate, given the underlying message from the Bank, it would be foolhardy not to consider the risk of a BoE rate hike by the middle of next year.  This factor should continue to offer cable support and should also slow the fall of GBP vs. the EUR.”  

“While the messages from the Bank since June have been key in supporting GBP/USD, a large part of the recovery in the past two months has been the result of the dismal performance of the USD.  The greenback is the worst performing G10 currency in the year to date.  This fall reflects an upwind of the optimism that lifted it in the final weeks of last year.  Given the deep divides within the Republican Party that have prevented healthcare reform, the market is no longer of the view that weighty tax reform will be forthcoming.”

“In addition, turmoil within the White House, benign US inflation data and a lack of confidence in the Fed’s ability to hike rates again this year has also weakened the USD’s appeal.   While US fundamentals has worsened significantly relatively to expectations that existed at the end of last year, there is a risk that the USD is currently oversold.  Consequently, we expect cable to trade modestly lower in the GBP/USD1.31 area on a 1 to 3 mth view.  On a 12 mth view we expect most activity to be captured by a 1.30 to 1.32 range.”