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GBP outlook and FED-BOE Policy Divergence

 

Tactically sell GBP/USD to capture any Fed-BoE policy divergence Consumer confidence in the UK bounced back to its pre-Brexit level in Sep, with expectations for the economic outlook also improving. The delayed triggering of Article 50 continues to act as a double-edged sword for UK markets: on the one hand it may allow for “business to continue as usual”, but equally we suspect it may simply be deferring a more pronounced slowdown in the UK economy. This cautious optimism is reflected in GBP price action, with sellers on standby for the next bearish catalyst. We remain tactically short GBP/USD to capture any nearterm Fed-BoE policy divergence. UK-US 2-year yield differentials remain close to recent lows and a further widening could be on the horizon were the BoE to lower rates in Nov, while Fed officials maintain a hawkish tone. Look for a test of the 1.2800/50 lows, with scope for a move down to 1.25 over a 3M horizon.