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UK: GBP dynamics, largely a function of the global risk outlook - BAML

FXStreet (Delhi) – Research Team at BAML, note that since the September BoE rate decision, GBP has underperformed, falling nearly 2% on a TWI basis with losses concentrated amongst the commodity bloc currencies which comes despite broad improvement in UK macro data releases with the economic data surprise index hitting its highest levels since the start of September.

Key Quotes

“UK rates markets have equally shrugged off the improvement in data and currently price the first UK rate for early 2017. Given the rate sensitivity of GBP, the narrowing of UK rate differentials versus its G10 counterparts has been the dominant driver for the pound’s underperformance in recent months.”

“It is instructive to note that following Monday’s much weaker-than expected service-sector PMI that GBP was not uniformly lower on the European close, but that price action was more a reflection of the prevailing market environment which was risk-on: gains versus the current account surplus currencies and losses versus $bloc high beta.”

“Despite global factors driving near-term GBP sentiment, the BoE rate decision and voting pattern will matter for the pound this week. Although the market has pushed back its timing for the first UK rate hike into 2017 a downbeat assessment by the Bank of England and the risk of a 9-0 vote could still lead to further GBP pressure.”

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