GBPUSD and Brexit
GBP drivers: Inflation expectations in the UK have risen faster than the dynamics globally due to the expected impact from the exchange rate shock. Here we look at yesterday’s GBP weakness and suggest that the currency is driven by political factors, ignoring some limited upside provided by the strong manufacturing PMI. Near-term data strength inspired by the almost 20% drop in the exchange rate (since November 2015) may push inflation expectations higher and delay further BoE easing, but it will likely do little to help GBP. The markets will now be watching for a break of the post Brexit low at 1.2798 in GBPUSD to test whether there will be further downside momentum. Today the BoE’s Saunders will release a new speech (note he is considered to be on the hawkish side of the MPC).
Why GBP should fall further. PM May’s commitment to trigger Article 50 of the Lisbon Treaty seems to follow political instinct to unify the Conservative Party but it does nothelp in respect of providing economic guidance.For now we think it would be most important to lay out a framework for how Britain’s trade relationship with Europe may look like in future. This vision could help companies making decisions concerning their future in the UK. Being outside the political EU (via Brexit vote) and inside the common market (by not triggering Article 50) would have given the UK the opportunity to define this target. Instead,exitnegotiations may now start in spring 2017, driven by political and not economic targets. With 46% of exports from the UK being sent to the EU, the UK may have to pay a high economic price for this strategy. GBP may have to fall further from here to compensate for this self-imposed uncertainty.