GBP/USD forecast - page 31
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GBP: 2 Key Reasons To Go Short Targeting 1.20
The US Presidential election’s outcome has been positive for the British Pound, which appreciated even against the USD.
But, the election of Mr. Trump has not changed our bearish view on Sterling. As we did after the UK High Court’s decision and the Bank of England's Monetary Policy meeting on 3 November, we here reiterate our view that the fall-out from Brexit will be extensive and maintain our year-end target for GBP/$ of 1.20 and for EUR/GBP of 0.90.
The recent appreciation of Sterling makes the entry point into a short GBP trade more compelling.
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British Pound & Dollar to Rise, Euro to Fall in Post-Trump Exchange Rate Landscape
The outlook for Pound Sterling has improved markedly now that Donald Trump get's to influence the new global order and it is the Euro that could struggle going through 2017 argue analysts at BMO Capital in a new brief to clients.
Sterling has strengthened since Trump's victory partialy due to growing hopes that Britain will be able to eke out an improved trading relationship with the US under a Trump administration.
The US accounts for around 30% of the UK's trade mix and the hope is that a pickup in trade with the country can pick up some of the slack left by an exit from Europe.
It is also being argued that the prospect of improved trading relations with the US will allow the UK a stronger arm when negotiating with Europe over Brexit, and should the UK walk away with a decent deal the Pound should move higher.
"We believe that Trump’s victory has cornered the European parties that have sought to make Brexit as painful as possible for the UK and thereby raised the odds of the UK and EU reaching a favourable Brexit deal that mostly preserves the economic status quo," says BMO Capital's Stephen Gallo in a foreign exchange briefing to clients.
Europe needs good trade relations with the UK regardless because as we note here, German GDP is highly dependent on the UK market.
Studies suggest that 20% of Germany's mighty current account surplus is derived from exports to the UK which could explain why Chancellor Angela Merkel appeared to rowback on the mantra that the freedom of movement of EU citizens was not up for debate if the UK were to seek single-market access.
Analysts at BMO Capital say the next potential bullish driver for the Pound against the Euro is likely to come because of the deteriorating political outlook for the Eurozone.
“Because we expect Trump’s win to bolster anti-establishment parties in Europe, we believe that the odds of the UK achieving a soft-Brexit with favourable terms have increased," says Gallo.
Others agree.
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British Pound Up vs Euro & Dollar on UK Retail Sales Blow-Out & Merkel Freedom of Movement Comments
An incredibly strong set of retail sales data has seen Pound Sterling move higher on Thursday November 17.
GBP is advanced in the wake of the release of notably better-than-forecast UK retail sales data from the ONS.
Headline monthly retail sales for October rose 1.9%, easily outstripping estimates for a reading of just 0.4% growth which represents the best reading for the sector in 14 years.
The previous month's reading was 0.1%.
Annualised growth now stands at 7.4%, up from a previous 5.3%.
The UK consumer is absolutely undaunted by the prospect of Brexit and because the UK is so heavily biased towards the services sector the data should keep the economy growing as we move forward into Brexit negotiations which are likely to start in the first half of 2017.
The also casts doubt on expectations for consumers to retreat into their shells on expectations of rising inflation resulting from this year's fall in Sterling.
But, this reading could be as good as it gets according to analyst Paul Hollingsworth at Capital Economics who reckons high-street spending will fail to maintain this pace going forward:
"After all, this week’s labour market figures highlighted that wage growth remains weak. Moreover, despite the slight dip in inflation in October, it still looks set to breach the MPC’s 2% inflation target in spring next year, and will end the year closer to 3%. Accordingly, the squeeze in real income growth is yet to come."
The lacklustre response by Sterling to the previous day's labour market data suggested to us that moves in response to the retail sales figures would be limited but it is hard to ignore such a strong reading.
The gains in Sterling following the retail sales release, while evident, are not exceptional and if these were normal times we believe the currency would be rocketing.
But these are not normal times and sentiment related to Brexit remains key for the UK currency.
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Hammond Gives British Pound a Boost vs Euro and Dollar as he Opens the Purse Strings to Spend on Boosting Productivity
Pound Sterling rose as the UK's Chancellor Philip Hammond announced an increase in spending on those areas of the economy that can help boost productivity.
The Autumn Statement prioritised additional spending on high-value investments, specifically in infrastructure and innovation - exactly the area we believed it would need to be directed were Sterling to get a boost.
The gains have come largely against the Euro as the US Dollar outperforms all its rivals following the release of some better-than-forecast domestic data.
"Sterling has notably held up rather well against an unrelated surge of the U.S. dollar this afternoon, moving just 20 price points lower between midday and now, possibly reflecting profit taking after a 30 pip advance in between," says Ken Odeluga, a market analyst with City Index in London.
Announcing his funding plans Hammond told lawmakers, “raising productivity is essential for the high-wage, high skill economy that will deliver higher living standards for working people.
"We can fund this commitment in the short-term through additional borrowing," said Hammond, "the productivity gap is shocking."
A new National Productivity Investment Fund was announced which would be funded to the tune of £23BN.
“A welcome £2bn boost to R&D - innovation funding should be accessible to more SMEs to deliver an economy that works for all,” said the Federation for Small Business in response.
The UK suffers a productivity level lower than that of Italy, France, the USA and Germany, indeed, the country lags that of the rest of the G7 by 18%.
The Bank of England has over recent years said that they would only consider raising interest rates should this productivity gap start coming down.
“We welcome Mr. Hammond’s infrastructure drive to build and improve the UK’s roads, railways and broadband. Investors and businesses alike will benefit from the funding, which will trickle down to surrounding sectors," says Agate Freimane, Senior Investment Director at BrickVest.
There was also a boost to exporters - something desperately required for the UK to close its massive current account deficit which would in turn give Sterling stability over coming months.
The Chancellor announced the Government would be doubling its export finance capacity.
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