GBPUSD: Risks and uncertainties remain - Scotiabank

The pound (GBP) has improved somewhat and analysts at Scotiabank have adjusted their forecast a little higher to acknowledge the likelihood that GBPUSD based around 1.20 earlier in the year. However, risks and uncertainties remain, they further add.

Key Quotes

“On the one hand, Prime Minister May miscalculated badly in calling a snap election. The result erased the Conservatives’ working majority of 17 seats in parliament and left it reliant on the support of a small, Northern Irish party to pass legislation. The election has weakened the UK government’s negotiating position just as it starts Brexit discussions with the European Union.”    

“On the other hand, UK inflation has been rising, reflecting the weak exchange rate to some extent. Rising prices may compromise consumer spending at a time when real wage growth remains minimal but a prominent minority of Bank of England (BoE) policy makers has urged rates to be tightened in response to inflation. We do not expect a rate hike in 2017 but the heightened rate speculation (market pricing reflects a 45% probability of a 25bps rate hike in December, up from 36% at the end of March) has helped underpin the GBP and deflect some of the political pressure on the currency. Our forecast calls for the GBP to remain more or less range bound around current levels in the next few months but we think the GBP is susceptible to growth risks and Brexit worries and we expect it to underperform versus the EUR in the months ahead.”