Get Ready For Another Big Slide In Cable: Where To Target
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Despite the fact that economic indicators have shown less of a slowdown than had been expected, the post-Brexit vote environment hasn’t been particularly positive for sterling. The recent short-covering rally in sterling ran out of steam just shy of 1.35, with the currency retreating thereafter. With some of the more pessimistic forecasts calling for an outright recession in 2017, investors are still wary of the spectre of additional policy stimulus from the Bank of England. Despite criticism from a number of politicians, Governor Carney could still ease policy further should data disappoint.
As time has progressed, the likelihood of a so-called ‘hard-Brexit’ has increased. That situation would involve giving up single market access for control over immigration. While the Bank of England can’t offset the long-term growth implications of such a scenario, it is increasing the chances that the MPC decides to take rates down to its effective lower bound of 0.10% in the coming months.
Markets are currently pricing in only a 25% chance of rate cut by year-end, leaving room for another cut to depress the currency. With the Chancellor giving a fiscal update on November 23rd, the precise timing of an interest rate cut is difficult to pin down. But whether the central bank eases ahead of that November fiscal update or waits until December, either outcome would see sterling weakening in the coming months.
CIBC targets GBP/USD at 1.25 by year-end.
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