12 May 2015
Forex news: Medium-term risks lurk for GBP – RBS
FXStreet (Barcelona) - The RBS Research Team, explain that after the election result euphoria fades, the attention will divert for GBP/USD towards weaker UK fundamentals, which implies that the pair might trend lower through 2015.
Key Quotes
“We see the outcome of last week’s UK election as GBP “friendly". This is mostly on a much reduced risk premium as the risk of no working government is gone for the foreseeable future. This allows for a greater focus on the UK’s safe haven status and the attractiveness of still positive yields when many in Europe are negative.”
“However, there are offsets. A Conservative majority implies a tighter fiscal stance and hence a looser monetary policy stance than under either a minority Labour government or another Conservative Liberal Democrat coalition. Lower for longer rates would seem consistent with a mildly weaker GBP, ceteris paribus.”
“While more certainty may see businesses and consumers become more confident about the future, this may not immediately show up in high frequency data as they are published with a lag. So data may weaken a little more before they strengthen. While many will probably choose to look through this at least initially, some doubts may linger that the UK slowdown goes beyond simply the impact of political uncertainty. For example, while it’s easier to see on-going housing market weakness as a consequence of concerns about higher property taxes, it’s harder to identity how manufacturing would have been impacted so much.”
“Weaker data and continued soft price data will most likely be key themes in this week’s May Bank of England Inflation Report. We are also watchful of more medium term implications of a new Conservative led government for an EU referendum and the associated uncertainty that may bring vis-à-vis FDI and other investment flows in the context of a very large (and rising) UK current account deficit.”
“There may also be broader market concerns about a possible new Scottish referendum in the face of the extremely strong showing from the Scottish National Party. However all these kinds of concerns are probably a slower burner topic for markets.”
“The more immediate currency moving theme is the surprise election result itself and the associated relief. As this fades, the focus may shift to weaker medium fundamentals. We thus hold to our long held view that GBP/USD trades lower through much of 2015.”
Key Quotes
“We see the outcome of last week’s UK election as GBP “friendly". This is mostly on a much reduced risk premium as the risk of no working government is gone for the foreseeable future. This allows for a greater focus on the UK’s safe haven status and the attractiveness of still positive yields when many in Europe are negative.”
“However, there are offsets. A Conservative majority implies a tighter fiscal stance and hence a looser monetary policy stance than under either a minority Labour government or another Conservative Liberal Democrat coalition. Lower for longer rates would seem consistent with a mildly weaker GBP, ceteris paribus.”
“While more certainty may see businesses and consumers become more confident about the future, this may not immediately show up in high frequency data as they are published with a lag. So data may weaken a little more before they strengthen. While many will probably choose to look through this at least initially, some doubts may linger that the UK slowdown goes beyond simply the impact of political uncertainty. For example, while it’s easier to see on-going housing market weakness as a consequence of concerns about higher property taxes, it’s harder to identity how manufacturing would have been impacted so much.”
“Weaker data and continued soft price data will most likely be key themes in this week’s May Bank of England Inflation Report. We are also watchful of more medium term implications of a new Conservative led government for an EU referendum and the associated uncertainty that may bring vis-à-vis FDI and other investment flows in the context of a very large (and rising) UK current account deficit.”
“There may also be broader market concerns about a possible new Scottish referendum in the face of the extremely strong showing from the Scottish National Party. However all these kinds of concerns are probably a slower burner topic for markets.”
“The more immediate currency moving theme is the surprise election result itself and the associated relief. As this fades, the focus may shift to weaker medium fundamentals. We thus hold to our long held view that GBP/USD trades lower through much of 2015.”