GBP/USD continues pushing higher, reaching 1.2550. The Brexit Bill continues making its way through parliament. What’s next?
Here is their view, courtesy of eFXnews:
The pound is deriving support from the rise in political uncertainty in Europe. It supports our contrarian outlook for EUR/GBP to decline towards the 0.8000-level during the first half of this year despite the expected triggering of Article 50.
We continue to believe that triggering Article 50 does not justify another sustained adjustment lower for the pound after it has already lost around a fifth of its value on a trade-weighted basis in recent years.
With the pound already discounting a lot of bad news, it leaves it more sensitive to good news in the near-term.
The pound’s rebound yesterday was driven in part by reports that PM May had compromised to contain a rebellion within her own party by promising a “meaningful” vote on the “final draft” of any EU exit agreement. It was initially hailed as a “huge” concession by the Labour party. However, the initial enthusiasm quickly subsided after ministers made it clear that if parliament opposed the final deal, the government would simply leave the EU with no deal at all. There would be no compulsion to return to the negotiating table to seek a better deal. Nor was there a promise of a vote if PM May concluded that no deal was possible and decided to walk away. Parliament has been offered a “take it or leave it” vote on any final draft agreement.
The pound also derived some support yesterday from hawkish comments from MPC member Forbes. She stated that she was “beginning to grow uncomfortable” over her tolerance for higher inflation given that the economy has not slowed sharply and is unlikely to in the near-term as well. “If these trends in both real and nominal data are solidified, it will become increasingly difficult for me to justify tolerating such a large and likely overshoot of inflation”. It could trigger her to vote for a rate hike “soon”. She is currently in the hawkish minority on the MPC. The latest MPC minutes revealed only “some” members were reaching their limits for tolerating the inflation overshoot. Therefore the BoE is unlikely to raise rates soon, but it could become more likely later this year if growth holds up, inflation expectations continue to rise, and wage growth proves stronger than expected which would offer more support for the pound.
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