Triple woes weigh on the GBP

By Giles Coghlan, Chief Currency Analyst at HYCM

GBP under pressure

The GBP has three key pressures on it limiting its upside. They are its monetary policy, the number of COVID 19 cases, and finally the Brexit cliff edge negotiations. These three issues are all a drag on the GBP.

Issue number 1: Monetary Policy

In the last MPC vote, Haskell and Saunders split the vote as they were looking for an increase in Quantitative Easing to £100 billion. Furthermore, Bank of England’s Haldane has been talking on negative interest rates over the weekend when he said:

“On negative rates, BoE buying riskier assets – says these are something the Bank needs to look at, and are looking at, with somewhat greater immediacy.”

Any introduction of negative interest rates will cause the GBP to fall. Therefore, expect any growing mention of negative interest rates to really accelerate the downside for the GBP if the mentions increase.

Issue number 2: COVID19 cases

The total number of COVID19 cases in the UK is just about 250K and the number of deaths is currently around 35K. This is the third-highest death toll and the fourth-highest number of cases in the world. The UK’s slow response to the outbreak of the COVID19 outbreak has led to some of the world’s worst numbers. At present COVID19 cases are falling, but watch for any pick up in cases to weigh on the GBP.

Issue number 3: Brexit deadline looms

If the UK’s transition period ends without a deal that will be the worst-case scenario for GBP bulls. The UK is not prepared ay present to give any grounds for an extension. Therefore, the so-called ‘Hard Brexit’ looks increasingly likely. These high stakes, politically charged deals often get done on the ‘steps of the court’ delisted the hard rhetoric, but even so, this deal is tricky and hard to see how it can be done quickly.

All of the above means that the GBP’s medium-term outlook remains a ‘sell on the rallies’.

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