GBP recovered slightly, however the correction is more likely short term then a structural shift. GBPUSD is consolidating around the 1.30 handle while EURGBP in a bull channel has no real resistance till 0.9415. The Bank of England remains dovish which corresponding to market pricing. Expectations of Interest rate hikes remain low with hikes only hitting the markets in late 2019. Despite improving inflation outlook, we don’t anticipate the BoE will shifted into full tightening mode until there is clear political direction around Brexit. A majority of GBP TWI is comprised of EUR, therefore the large overshot in EURGBP will worry BoE policymakers and decelerate improving inflation outlook.
Brexit talks and splashy headlines will dominate the GBP directions yet division over unity feels in control, as the details of Brexit bill have been slow coming. October UK party conference will help provide clarity on the depth of political discourse. Investors will be watching German elections and UK October conference cautiously signals by key politicians (note, tough talk on Brexit generally scores easy political points). We see UK domestic economics to take a backseat to politics, which will weigh on GBP. In regards to Europe, pro-EU, deeper financial integration comments from Germany’s Merkel and France’s Macron suggest that a decisive Merkel victory is likely to lead to stronger Euro. EURUSD above the 1.20 and our favorable outlook for European economic and political conditions indicate further upside for the pair.
By Peter Rosenstreich