GBP to remain bearish against both dollar and Euro in medium-term - SocGen

Kit Juckes, Research Analyst at Societe Generale, suggests that he didn’t expect such a well-flagged monetary policy easing as the UK delivered yesterday to have as big an impact on the currency as it did, even if the MPC went a good bit further than we’d expected.

Key Quotes

“Over the medium term, we remain bearish of sterling against both dollar and Euro, looking for GBP/USD to fall to 1.20-1.25 and EUR/GBP to get a lot closer to 0.90 before we’re done.

For the pound and short-term market rates, the message that the MPC isn’t ‘done’ with easing is probably the most important part of the decision yesterday. They expect rates to get close to zero and given their reluctance to cut rates into negative territory, further asset purchases, mostly of gilts, are very likely too. That message is locking lower rates in for longer, even more than the larger-than-expected increase in asset purchases (GBP 60bn more gilts, GBP 10bn more corporate bonds) and the introduction of the Term Funding Scheme.

Brian Hilliard’s biggest takeaway is that the growth forecasts on which the move was based seem optimistic. Not in the initial hit to GDP growth, where the 2017 forecast is revised down from 2.3% to 0.8%, but in the anticipation of a rebound to 1.8% in 2018. If uncertainty remains a drag on growth for longer (which it surely will), that will add to pressure to do more.

The only thing which would change that (apart from a weirdly quick resolution of the UK’s relationship with the EU) would be a significant easing in fiscal policy. For now, we’ll try to weigh the all-encompassing bearish market mood and positioning against the equally bearish fundamentals. The pound will fall and I will fill judging the twists and turns as it does difficult.”