GBP: Use Any Bounce As An Opportunity To Sell Into Next Week's BoE
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BoE rate cuts. Given the uncertainty and likely economic downturn, we expect the BoE to use its financial crises play book. That means ignoring sterling driven inflation, quickly taking interest rates to, or close to, zero and subsequently restarting QE. We change our call a little though. We had expected a 50bp rate cut, taking interest rates to zero, on July 14. We now look for rates to be cut to 40bp to 0.1%
We also expect the BoE to restart QE, possibly as early as August. Carney signaled that was on the table, along with other measures. He was not specific about those possible other measures, but our best guess would be that the BoE copies some of the ECB’s innovations.
Sterling has continued to weaken in aftermath of the EU Referendum with GBP/USD falling to its lowest levels since 1985 and with many of the other GBP crosses hitting multi-year lows. And even though the move have been sizeable, we think there is further weakness in store which poses downside risks to our 1.25 cyclical low in GBP/USD.
The evidence on the macroeconomic fall-out from the Referendum result is still in its anecdotal phase but the initial signs have been concerning. This week alone, six UK asset managers have suspended redemptions from their UK property funds, whilst the John Lewis weekly store sales growth slowed in the week following of the Referendum. The YouGov/Center for Economic Business Research daily macro tracking survey shows significant weakness in both consumer and business sentiment. Our concerns for GBP are two-fold: the macroeconomic impact as data for the full post Referendum period emerge and the constraints placed on the currency by virtue of the UK's sizeable current account deficit. Financing of that deficit, which was under close scrutiny headed into the Referendum, will now be front and center for investors. We believe that the deficit will be increasingly exposed as the volatile macro and political backdrop deters foreign investment decisions (short- and long-term) into the UK.
A rate cut should come as no surprise but even a more conservative 25bps rate cut will not provide any relief for the pound and we would use any bounce as an opportunity to sell into.
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