The free fall in GBP is difficult to ignore as GBP/USD and GBP/CHF pairs are trading at early 2017 ranges while the situation in GBP/JPY is less rosy as the pair trades at late 2016 levels, confirming that GBP weakness is heavily skewed towards Brexit headlines, while upside moves are particularly short-sighted. The release of inflation data for the month of June, as is the case for the job report, is likely to be ignored ahead of next week Conservative Prime Minister elections. Yet although market participants are anticipating a major victory for Boris Johnson and so of a hard Brexit, chances are that they discount the risk of a stuck majority in the House of Commons and a less stringent stance from European Commission in Brexit negotiations.
Inflation is expected to have remained stable in June, with y/y and m/m CPI forecasts at 2% and 0% (prior: 2% and 0.30%). Despite the release, we don’t expect the Bank of England to take any major decisions accordingly, as early general elections and the resumption of Brexit talks are underway. Following the nomination of EU Commission President Ursula von der Leyen along with other EU top position leaders, it seems that the risk of a no-deal scenario is likely to decrease as a change of EU negotiators will occur. Although current Brexit deadline is set for 31 October 2019, a major UK political disruption (e.g. early general elections planned by Boris Johnson following his nomination) should trigger a short-term extension, thus allowing fresh negotiation with new EU representatives. The recent violent downtrend in GBP is mostly explained by yesterday Prime Minster debate where both candidates confirmed they would be willing to remove the Irish backstop from current Withdrawal Agreement deal. GBP should be maintained under pressure considering upcoming 1 August BoE monetary policy meeting. However, positive headlines concerning Brexit should provide strong upward moves looking forward.
GBP/USD is trading at 1.2402, approaching 1.2380 short-term.
By Vincent Mivelaz