Analysts at MUFG Bank argued that further gains in the pound (GBP) will prove more challenging as volatility eases.
“The reduction in Brexit and political uncertainty has encouraged a stronger pound with cable briefly rising above 1.3500 and EUR/GBP below 0.8300. However, it may be as good as it gets for the GBP for now. The positive election result appears well priced into the GBP.”
“The initial discussions are unlikely to be as market moving for the GBP whose recent elevated level of volatility is set to fade. It could allow the GBP to be driven more by economic fundamentals again. Market participants are optimistic that the UK economy will rebound early next year after hitting stall speed in recent months and further boost the GBP. However, it will be tested by the incoming UK data flow.”
“If weak growth proves more persistent than expected it will encourage the BoE to move closer to a rate cut in 2020. We expect the BoE to maintain a dovish policy signal at next week’s policy meeting in light of weaker than expected growth so far in Q4, although they may acknowledge that downside risks have eased in response to US-China trade deal optimism and the positive UK election result. In these circumstances, we believe that the GBP will find it more challenging to extend its advance in the near-term. A lot of the good news has already been priced into the GBP after it strengthened sharply by 13% against both the USD from the September low, and the euro from the August low.”
“The pound is also set to become less volatile after the period of pivotal event risk has now passed. Another dovish BoE policy update could remind market participants that the direction of the GBP is not a one way street. Downside risks will build if UK growth continues to disappoint.”