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GBP: UK currency tumbling under pressure - Rabobank

FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, suggests that the UK Pound has been under continuous pressure as the majority of recent UK economic data support the view that the BoE need be in no rush to hike interest rates and the pushing back of BoE rate hike expectations has been a key contributor to the easier tone in the UK effective exchange rate.

Key Quotes

“The release of the UK September manufacturing PMI at 51.5 suggests that conditions facing the sector may be stabilising, but there is little doubt that British manufacturing has had a poor quarter. The Quarterly survey from the British Chambers of Commerce published today found that the manufacturing export sales balance reached a six year low in Q3. Official data showed that UK manufacturing production dropped by a worse than expected -0.8% m/m in July and these data coincided with news of a wider than expected July trade deficit.”

“It has become increasingly difficult to dispute the fact that sterling strength has become a headwind to some businesses in the UK. In August the UK effective exchange rate (BoE measure) ramped up to its strongest level since early 2008 marking a 21% increase from the 2013 low.”

“Soft commodity prices and sterling strength has also contributed to the retreat by CPI inflation back to the zero y/y level in August. The minutes of the September MPC meeting note that a pickup in CPI inflation is expected at the turn of the year.”

“The money market has pushed back its expectation for the first BoE rate rise to the end of 2016 and we have dismissed our long-held forecast of steady rate until May 2016 in favour of August 2016 for the first BoE move.”

“In view of speculation that both the ECB and BoJ could increase their QE plans this years and that the Fed may delay its first policy move into next year additional sterling losses could be difficult to achieve. We still see scope for EUR/GBP to edge towards 0.70 on a 6 to 9 mth view.”

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