GBP Recovery Running Out Of Steam; Fade Rallies Targeting 1.24
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Key UK data this week covering the month following the referendum have all surprised on the upside, with July CPI, jobless claims, and retail sales all coming in better than expected. With the exception of CPI, which we expect to continue to climb the effects of GBP weakness filter though, our economists continue to expect deterioration in the months ahead as hiring and investment have likely stalled in the aftermath of the vote.
Despite the better data, markets continue to price around 10bp of further easing by year-end and, with inflation expectations rising even as BOE operations cap UK yields, GBP real yields are becoming increasingly negative. Our positioning metrics signal that GBP shorts had become somewhat stretched heading into this week, so the GBP’s ability to gain back some ground on the better data flow is not surprising.
However, we think current account financing challenges remain significant for the UK and we continue to target GBPUSD at 1.24 by quarter-end.Key UK data this week covering the month following the referendum have all surprised on the upside, with July CPI, jobless claims, and retail sales all coming in better than expected. With the exception of CPI, which we expect to continue to climb the effects of GBP weakness filter though, our economists continue to expect deterioration in the months ahead as hiring and investment have likely stalled in the aftermath of the vote.
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