GBP: Despite recent correction, market still long - Rabobank

According to analysts from Rabobank, there is further downside potential for the pound in the coming months. 

Key Quotes:

“Despite the recent correction, it is likely that the market is still long GBP. This supports our view there is further downside potential for the pound in the coming months. The market will be carefully watching UK data in order to assess the likelihood of policy moves going forward. We doubt that the Bank will strike a hawkish tone at its policy meeting on May 10 and this should provide some support for the pound.”

“Afterall, Bank models have been suggesting that nominal wage growth should hasten in the coming months. Added to this, optimism that CPI inflation will moderate increases the chances that real earnings will recover this year. However, higher pension contributions for a significant sector of the population and the risk that oil prices could rise further could keep a lid on consumer confidence. In addition, slower growth in the Eurozone is also likely to feed back to the UK via export demand, while the BoE’s April credit conditions survey reported that availability of unsecured credit to households decreased significantly in Q1 largely driven by a changing appetite to risk amongst lenders. It is now our view that the BoE will delay a rate rise until August.” 

“We see scope for a softer pound in the coming months. Sluggish UK growth has impacted the market’s confidence in the ability to the BoE to hike rates, while the chances of another crisis within the government appear to have risen again. That said it remains our house view that the EU/UK will eventually agree a comprehensive post Brexit free trade agreement. The latter would be a very welcome relief for GBP. Consequently, we have pencilled in a sharply improved GBP on a 12 mth view.”

“It remains our house view that the bones of a UK/EU free trade agreement will be on the table before the start of Brexit in March 2019. For this reason we are forecasting a stronger pound on a 12 mth view. That said, this is a very short timeframe to hammer out an agreement on trade and we expect political uncertainty to push EUR/GBP to the 0.89 level in the coming months.”