GBP/USD bears testing bull's commitments at 1.30 psychological figure
- BoE not enough to keep the bulls in play.
- GBP/USD bears taking back control, cleaning out optimism.
- Testy forthcoming UK/EU future relationship talks hurting outlook for GBP.
GBP/USD is trading at 1.2997 between a rang of 1.2989 and 1.3183, falling heavily through sell-stop liquidity again as investors settle down and ponder on what Brexit trade negotiation risks await them for the year ahead.
GBP/USD got a boost from, a) promising PMIs on the 24th Jan, albeit with a composite number still below the preferred 52, b) a hawkish surprise lean from the Bank of England and c) relief that the UK has finally left the European Union after many years of conjecture in the markets.
The trigger for today’s drop was politically motivated. "UK PM Johnson and EU Chief negotiator Barnier have been laying out their stalls ahead of the forthcoming UK/EU future relationship talks and the signals suggest that those talks could be testy," analysts at Rabobank explained, seeing risk of cable trading below the 1.30 level on a 1 and 3-month view as the talks progress.
GBP to remain vulnerable
GBP is likely to remain vulnerable until businesses get a sense of where the negotiations are leading. Media will be all over each and every twist and turn. So, for those who banked on a firm pound purely on the basis that, perhaps, because the Bank of England vote was once again 7-2, despite what seemed like a more dovish tone from BoE speakers since the start of the year, or considering there wasn't a single additional vote for a rate cut compared to November and December, have been hung out to dry and will need to reconsider their outlooks.
The forward guidance from the MPC's statement was also little changed from December, citing two-way risks for policy rates, however, business sentiment will depend hugely on how the trade talks go. On an encouraging note for GBP investors, the FT has reported that Nissan may pull out of mainland Europe and double down on the UK production if Brexit leads to tariffs on car exports. "The company’s official policy, however, is that its entire business in the UK and the EU would not be sustainable in the event of WTO tariffs," analysts at Rabobank added:
"It is clear that for thousands of business across the UK and Europe, there is a lot riding on the outcome of the UK/EU future arrangement talks. Until more clarity emerges we expect GBP to be vulnerable."