GBP sees re-evaluation – Rabobank

Jane Foley, the senior FX strategist at Rabobank, notes that the weekend comments from MPC member Vlieghe were the third set of dovish remarks from a BoE policymaker since the start of the year after those last week from Governor Carney and Tenreyro.

• "The remarks have been followed by yesterday's releases of poor UK production figures and weaker than expected November UK GDP data which at -0.3% m/m reinforces the fact that the domestic economy is growing below trend. Insofar as CPI inflation at 1.5% y/y currently is also lower than the Bank's 2.0% inflation forecast and recent retailing surveys have been soft, the market is considering the likelihood that the January 30 MPC meeting could be bring a potential change in interest rate policy. This view has been clearly reflected in the drop in the value of GBP.
• Having broken below the GBP/USD 1.30 level yesterday, cable dipped as far as 1.2950 this morning before pushing back to 1.30. Despite this bounce, we see risk that unless forthcoming UK economic data releases surprise to the upside, cable could soon set its sights on the post-election low close to 1.2905.
• Since PM Johnson became PM, the market has taken a consistently more optimistic outlook on GBP on the expectations that political uncertainty in the UK would decline. CFTC speculators' data show that net positions have been positive for the past three weeks which is the longest run since the middle of 2018. That said, already GBP has given back a significant proportion of its post-election gains.
• In view of perceived rate cut risk and given that the UK and the EU still have to hammer out their future relationship, some of this optimism could be misplaced. Given the soft economic backdrop, we maintain our view that GBP/USD could struggle to hold levels above 1.30 on a 3- to 6-month view unless solid progress is made in the UK/EU future relationship talks."