GBP/USD extends losses and approaches 1.2200

• GBP/USD reversal from 1.2350 extends to session lows at 1.2205.
• Pound underperforms on BoE negative rates and Brexit risks.
• Longer-term, the pound is seen at 1,3800 by year-end  – UOB.

The cable is dropping sharply on Wednesday, losing nearly 1% on the day after having peaked at 1.2353 to reach levels right above 1.2200. Investor’s concerns about negative interest rates in the UK and about the impact of the Brexit are punishing the sterling.

BoE and Brexit are weighing on the pound

Investors are selling the sterling on speculation that the Bank of England might cut interest rates below zero to support economic recovery. BoE governor, Andrew Bailey spooked the market last week opening the doors to negative interest rates and BoE chief economist Haldane’s comments dismissing it have not been enough to change investors’ sentiment towards the sterling.    

Furthermore, the lack of progress on the Brexit trade agreement with the EU and UK’s refusal to extend the transition period beyond the end of the year are increasing the odds of a no-deal exit from the Union, which is increasing negative pressure on the pound.

GBP/USD at 1.3800 by year-end – UBS

From a wider perspective, FX analysts at UOB see the GBP undervalued, and expect it to appreciate towards 1.3800 over the second half of the year, “Our preferred G10 currency to buy relative to the US dollar is the British pound. The currency remains deeply undervalued considering our estimate of purchasing power parity at 1.53. We target GBP/USD at 1.38 by year-end for our upside scenario, and 1.33 in our central scenario.”

GBP/USD key levels to watch