BoE action will ensure another leg lower for pound - MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the pound is under-performing this morning and is lower for the fifth consecutive trading day – the longest losing streak versus the dollar since the Brexit vote on 23rd June.

Key Quotes

“The BoE’s action last week coupled with the stronger than expected jobs report from the US last Friday has helped reinforce expectations of a sustained period of divergence between the US and the UK that will keep the pound under selling pressure.

One of the key factors in shaping those expectations was the explicit signal by the BoE that it was likely further easing would take place later this year. Governor Carney also emphasised that the four aspects of monetary easing – Bank Rate, Gilt buying, Corporate bond buying and the Term Funding Scheme – all had scope for implementing further easing.

In that regard the article written by MPC member Ian McCafferty in the Times is telling. In the article he argues that the BoE will need to “conserve ammunition to win the war” by making the point that the MPC needs to act cautiously now in order to assess whether the actual hard data going forward will be as bad as the survey evidence already released suggest. If that proved to be the case, then the MPC would be able to “do more without undue delay”. So his opposition to QE in the Gilt market, which he voted against, was not ideological and was more about taking time to assess the data.

So if the data is consistent with the survey evidence then McCafferty will be supportive of further action. With the BoE already explicitly signalling more easing, this may seem like not much but the signal of willingness to ease by one of the more hawkish members of the MPC does suggest a low bar for further action.

One piece of hard data now available is the BRC retail sales data for July, which revealed a stronger than expected gain of 1.1% year-on-year on a like-for-like basis. That was a notable improvement from the -0.5% reading in June and certainly points to UK consumers getting over the initial Brexit shock quite quickly. However, we should perhaps view the data with a note of caution. BRC Chief Executive, Helen Dickenson did cite strong discounting and it remained unclear whether demand would hold up under full-price sales. July also saw a notable improvement in weather, which would also have helped.

But certainly a key part of further declines in GBP/USD will be better sentiment for the dollar. The dollar is now weaker against nearly all G10 currencies on a yr-to-date basis – only the pound and Swedish krona (1.7%) are weaker. The pound on the other hand is nearly 12% weaker. With valuation and positioning also working against any sharp drop in the pound, we expect the decline in GBP/USD to be gradual.”